Standing Senate Committee on National Finance
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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE

EVIDENCE


OTTAWA, Friday, December 8, 2017

The Standing Senate Committee on National Finance, to which was referred Bill C-63, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures, met this day at 9 a.m., to give consideration to the bill; and, in camera, for the consideration of a draft agenda (future business).

Senator Percy Mockler (Chair) in the chair.

[English]

The Chair: My name is Percy Mockler, a senator from New Brunswick and chair of the committee. I welcome you to this meeting of the Standing Senate Committee on National Finance.

I also welcome all those who are with us in the room and viewers across the great country of Canada who may be watching on television or online.

I would like to ask senators to introduce themselves, starting on my left, please.

Senator Marwah: Sarabjit S. Marwah, Ontario.

[Translation]

Senator Maltais: Senator Ghislain Maltais from Quebec.

[English]

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

Senator Plett: Welcome, minister. Don Plett from Manitoba.

The Chair: Thank you, senators.

Today we will continue our consideration of Bill C-63, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017, and other measures to it.

This type of legislation is directly in line with the mandate of the Standing Senate Committee on National Finance.

This morning, honourable senators, to discuss the budget implementation act, 2017, no. 2, we welcome from Manitoba the Minister of Finance.

I thank you very much, minister, for your availability. I have been made aware that you will make a short presentation, and then senators will be asking questions.

Hon. Cameron Friesen, Minister of Finance, Government of Manitoba: Thank you, everyone, and good morning from Manitoba. I apologize if my voice is a little squeaky. We were at the premier’s last night singing Christmas carols, and I am paying the price for that.

I am pleased to be here this morning to speak briefly on the subject of cannabis taxation. You’re all aware, of course, that the finance ministers will be in Ottawa on Monday to further discuss the proposal that the federal government has put on the table for a fifty-fifty split of the excise tax. There will be decisions that need to be made by all provinces about that.

Our premier has been clear. From our perspective, we take the view in Manitoba that when it comes to cannabis it is safety first. We owe a duty of care and safety in Manitoba to all those who will choose to use these products when they are legalized. We owe the same duty to all those who choose not to.

We’ve said from the start that this process has been rushed. We feel that the federal government would have done better if it was a key policy to take more time to ensure that everyone clearly understands their obligations, the systems that need to be in place, the regulations that need to be in place, and the legislation that will be necessary.

However, the timeline clearly now is what it is. Manitoba has worked quickly to ascertain the challenge and to understand the scope of what will be necessary in the province. Even yesterday, in the Manitoba legislature on the last day of this fall sitting, we were debating our cannabis legalization legislation. Certainly Manitoba is at work.

Let us be clear when it comes to cannabis legislation. The lion’s share of the responsibilities and the lion's share of the risk fall to the provinces. Whether we are talking about public education or public awareness campaigns, whether we are talking about the costs that will undisputedly be there for health and mental health, or whether we are talking about issues in the courts, roadside policing or other policing matters that arise, not to mention the regulatory responsibilities that fall to all provinces, we know and understand this work is that of all provinces.

Essentially the lens through which we see this issue is as follows: This is principally a federal policy that is being implemented, and the provinces are picking up the majority of activity and resource costs. Having said that, we will take that view into the meeting this weekend.

I was clear in our last finance ministers’ meeting in principle, of course, revenue generation was the wrong place to start this conversation. For so fundamental a policy shift on the Canadian landscape and in the interests of all of our citizens, we said that first and foremost safety is the starting point. However, now as finance ministers, this is what we’re talking about and that’s the lens through which we see these things.

I’ll make one more point and then I’ll pause there. The last point I would make is that these are imperfect conditions that we have entering the finance ministers’ meeting because we’re talking about known costs, projected costs and still to be known costs. There is a lot we do not understand. There is a lot we do not know at this juncture. We are working quickly as jurisdictions.

You’re all aware of the premiers’ working group. Our own Heather Stefanson, the Minister of Justice in this jurisdiction, was the co-chair of the group that was collecting and feeding back to premiers fundamental information. There’s still much to uncover and there’s still much to understand categorically about each of the risks and responsibilities that I named.

That will be our view going into the meeting. Clearly, any discussion about revenue must be seen through the lens that the provinces have the responsibility, the provinces take the risk, and the resources should flow to the entity that has that responsibility and risk.

Senator Marshall: Thank you, minister, for joining us today. We had some discussions yesterday with regard to the section of the bill on the cannabis taxation agreement. We were talking to federal officials, and we were trying to get a handle on the dollar amount that they were using as a base. I know it would only be an estimate. We didn’t get any information whatsoever from them, but in your opening remarks you talked about your costs to date and your projected costs.

Could you give us some idea as to the magnitude of what those costs are? It seems to me that this is being done backward. We’re putting all the policies in place, or some of them. We don’t have any idea as to the costs or what the arrangement will be with the provinces and with the municipalities because they are to share the burden of some of those costs. Could you give us an idea as to the magnitude of the costs for the Province of Manitoba?

Mr. Friesen: Thank you, Senator Marshall, for the question. My answer will be unsatisfactory to you.

I think you hit the nail on the head when you said this is being done backward. As federal, provincial and territorial finance ministers we will be in a room in a few short days. We will sit around the table, and immediately the conversation will go to what an appropriate sharing arrangement may look like for those who would choose to sign on to a federal agreement on excise tax, but we have imperfect and not enough information.

Categorically, I cannot tell you at this point what it will mean for policing. I cannot tell you what it will mean for our courts. I cannot tell you what it will mean for education. We understand the federal government has gone out and said, “We will have some dollars available in each jurisdiction for education,” but we understand that it took years for Mothers Against Drunk Driving and other organizations, never mind municipal, provincial and federal governments, to convey a consistent message to denormalize the activity of drinking and driving. We have no such on ramp when it comes to cannabis.

For roadside policing education and the regulatory activities that we will undertake, I would say this issue is so dynamic that day by day we are learning more. Even understanding what these things have meant in jurisdictions like Oregon, Colorado and other places, this evidence is still just emerging.

We simply don’t know but I would say this: That is why it is so important to understand that we need to enter into an interim relationship. If we are to broker any agreement, it must be on the basis of let’s agree that we don’t know the costs. Let’s continue within that framework and in a few years we will have more data to drive a better understanding.

Senator Marshall: There’s a big risk in all of this because there’s so much unknown at the front end. We talk about the social risks. I’m just looking at the financial risk. We’ve heard a variety of dollars with regard to what the taxation will bring in. Even if we assume it will be $1 billion, and some people say $5 billion, if the provinces get 50 per cent of that, the cost of administering this might far exceeds whatever you will get in taxation revenue from the federal government.

It’s a big risk to the country, but it’s a big risk to the provinces and their fiscal frameworks also.

Mr. Friesen: Thank you, senator. You’re exactly right. We’ve said it ourselves as a province.

There is no guarantee that revenues will run above cost. I think statements would suggest that this will be a windfall. We don’t take that view. We have no guarantees that revenues will be sufficient to address system costs, as you say, so we are concerned about that.

Thank you all also for another word that you used, which is “risk.” Yes, there are system costs and the provinces will take up the enormity of those system costs in all of those areas. Also, the province will undertake the risk for all of this. The risk on this is enormous.

Senator Pratte: Minister, how do you see the role of municipalities in this sharing? Yesterday, we had a representative of municipalities from New Brunswick. We also discussed this with federal officials. The federal finance minister also discussed this with this committee.

The municipalities, first of all, would like to be at the table with you on Monday. The municipalities would like to have a direct share of those revenues. If not, at least they would like a share from the revenues the provinces would have access to. Certainly they will have a large part of the responsibilities and of the costs that will come from the legalization of cannabis.

How will you deal with that, with the municipalities in your province?

Mr. Friesen: Thank you, Senator Pratte, for the question. It’s an important one.

I want to say upfront that I should have emphasized one more thing on the previous question as well. I know that when we go to Ottawa in a few days we will go around the table. I imagine the question will be asked of all the provinces: “Tell me about your costs,” just as Senator Marshall asked and rightly so. I really think the onus should be on the federal government. They’ve put a proposal out there for an equitable share of excise tax. Really, the question to be asked in all of this context is: “What is the federal cost in all of this?”

When we run these numbers, we don’t see a federal cost that runs anything above what would be a small administrative activity. To the previous question, I’d say the question in all of this we need to ask is: “What has the federal government done to quantify their anticipated cost?”

On your question, sir, it’s a very good question. Last week in Manitoba was the annual convention of the Association of Manitoba Municipalities. At that convention was a lot of interest on the floor in plenary sessions around cannabis legalization. Municipalities have costs.

I will make a few points. In the Manitoba hybrid model, we have given municipalities the right to decide for themselves whether cannabis retailing can take place in their jurisdictions, in their own local areas. We are giving them the authority to either allow it or to disallow it.

We call that our “fair say approach.” The municipalities are highly involved. We know in the Manitoba model that municipalities will be able to grant business licences, so there will be a generation of some revenue there. We also know that when there are infractions, those penalties and fines will be written to municipal governments. There will be a flow of revenue there as well, but certainly I am not suggesting that there will not be costs.

Right now, of course, cannabis usage, possession and trafficking are all illegal. Right now police services have competencies. They have capability. They have capacity now. They incur costs now for assessing fines for cannabis usage, possession and trafficking. We should clearly see this as an incremental increase in their responsibility. It’s not a whole new increase. However, those voices are there.

I think it only underscores the importance of locating the enormity of the resources, the tax revenue in the province’s hands, because clearly municipalities will be coming back to ask for more financial resources to help them do the job.

Senator Pratte: I have a supplementary question, sir. I’m not sure if the Federation Canadian municipalities have asked for this directly, but we have certainly heard that some municipalities would like an arrangement similar to what was agreed to with the gas tax a few years ago, whereby revenue from the gas tax would flow directly to municipalities from the federal government.

Would you agree to a similar arrangement for the cannabis excise tax?

Mr. Friesen: Senator, I would say that it’s too early. It goes back to the last question. We’re not in possession of data that we can point to. We are negotiating in the dark. We take that view. We know from other jurisdictions in the United States that the state government in that case incurred the majority of costs. The fairest way forward in the interim is to allow those resources and the tax revenue to go to the provinces and then to deal most effectively from there with costs that arise in local governments.

I’m challenged by the thought that somehow now we should have municipalities with an allocated amount directly within this arrangement. It raises more problems than the answers that it provides.

Senator Andreychuk: Minister Friesen, thank you for coming before this committee a second time in a very short time. It has been helpful on the previous occasion and it certainly is this time.

Has the federal government given you any reason why the rush for this July 1 date? I recall the debates over the last 10 years were all about decriminalizing. The reason for it, on a policy basis, was that too many young people experimenting and others were being criminalized for small amounts of use. I think that took some time to resonate in the community but it was a valid point that most people were coming to terms with. More recently, the federal government has said it’s to stop illegal activity. It’s only when the actual bill was almost before us and in the actual conversation regarding July 1 that we started talking about revenues.

From your perspective, will the policies be as much of a problem to determine the revenue as determining who gets what share? If I’m getting your point, you’re not quite sure what you’re facing because you’re not quite sure what is going to happen and you’re not sure who is going to help whom. That’s the first part.

Second, have the provinces discussed the difficulty with it being given to the provinces? I don’t see a commonality in some of the responses from the provinces, which will be more of a difficulty for the public again. I recall the good old years when 16 was the age of adulthood with young offenders in some provinces and 18 in others. Because families were mobile I also recall the confusion that caused in imposing bond, following them, et cetera. This will be even bigger.

Have the provinces discussed not only the revenue stream but also how to tackle the policy issues that will flow out of this?

Mr. Friesen: Senator Andreychuk, it’s great to see you again. Thank you and your committee members for being in Winnipeg a few weeks ago.

It strikes me this morning that this discussion is similar in many respects to our previous discussion on the federal proposals for changes on tax treatment to small corporations. At that time I stated that Manitoba took the view that process certainly is rushed. This process is also rushed.

If we want to do this well we require adequate time. Mistakes are going to be made here and Canadians should be disabused of any notion to the contrary. Like it or not, on July 2, cannabis will be legal.

Our premier spoke to the governor of Colorado and he said, “If we had only had more time.” He reflected at one point, “Looking back now, we had no idea.” When you look at the morbidity rates, injury and death on highways, mental illness and suicide rates among youth, there is so much to get right. We can’t underscore enough the importance of even things like an education campaign.

I’m a former educator. I know what it means to deliver a message but to truly teach and change behaviour takes a long time. Youth need to hear this message again and again and again. I think that young people today do a much better job of policing each other when it comes to their social obligation to keep someone from climbing behind the wheel who is intoxicated from alcohol. A lot of people out there are labouring under a view somehow that marijuana makes them drive better. This is the kind of challenge we’re going to have to face.

Senator Andreychuk, on your first question, yes, somehow we slid from an initial focus on what was supposed to be safety to now a focus on revenue. Now I get it. We’re the finance ministers, so that’s the question predominantly that will face us in the context of that meeting. However, for Manitoba, our view is safety first for our children, keep this product out of the hands of kids, and limit the black market activity here. I would be remiss if I did not state that I think everyone in this conversation is labouring under a misconception if they think that somehow this will be easy to shut out black market supply.

On your second question, in the context of this rush job to get to a point where this is all legal, we have all these disparate approaches across the provinces. We have different tax regimes. There will be jurisdictions with HST that approach this. There will be Alberta with no retail sales tax. There will be discussion around markup or provincial sales tax. The federal government has stated that they are of the view that they should be able to influence the extent to which provinces can apply a markup rate.

We’re shocked by that kind of statement because that is not a federal responsibility or a right. In the end, there will be very different approaches between provinces that will create its own challenges. We are speaking as jurisdictions. I believe that right now we are united in basic principle. However, you know and I know that Manitoba has seen this movie before where there is broad-based agreement going into a finance ministers' meeting and then coming out the back end with less of a broad-based agreement.

We’ll stand our ground and argue for the reasons you stated: the complexity, the sudden focus on revenue generation, and the assumption that revenue will be sufficient. We’re taking this pause to say, “Let us see this through the lens of having a long landscape that will provide data.” We’re right now asked to make a decision on the next two years and a framework for revenue sharing. In this two-year period resources should go to the provinces because the provinces will have all of this responsibility.

[Translation]

Senator Maltais: Thank you very much, Mr. Minister. Welcome to the committee. I am going to talk about the issue of municipalities with you.

Municipalities have to have their budgets ready for the following year at the end of December. We all know that municipalities will have to forecast the expenditures needed to look after safety and education in their cities and to have the equipment they need to check THC rates in the blood of drivers. It makes no sense to have to forecast expenditures without being able to forecast revenue. If the revenue turns out to be inadequate, municipalities will be forced to increase taxes in order to pay for the equipment they need for their citizens’ safety and education. That’s the first part of my question.

The second part is that there are cities located on the borders of other provinces. Will the legal age for consuming cannabis be the same in those border cities as in the other province? If so, that's great, but if not, there may well be yet another problem. So my question has two parts, Mr. Minister, and I would like to hear what you have to say.

Mr. Friesen: Thank you for the question, senator.

[English]

You make some important points. As I stated earlier, we certainly acknowledge that municipalities will have costs. I’ve made the point that the costs they will incur are incremental because, of course, right now there are costs already that municipalities incur and small revenue that does arise through fines, penalties and that kind of thing. Certainly that cost is there.

The municipalities are a creature of the provinces and we are principal funders of the municipalities. The grant support we have globally from municipalities in the provinces is why I say that any revenue share proposal should locate taxation revenue now with the provinces. Then we can make those decisions in partnership with the municipalities to quantify those new costs and to allocate resources appropriately to them.

On the second question you raised, the process is rushed. We have not had adequate discussion about this issue. I don’t know if you know where my constituency is located, but I am south of Winnipeg. The cities of Morden and Winkler are 15 miles north of the U.S. border. We have not even begun to think about what this could mean for a new form of cross-border shopping, if you will. This is going to create some real economic activity, but not the type that we want to encourage for the Canadian CSBA, and the local police right across the expanse of the whole Canadian-U.S. border.

From discussions with the premier I know in a recent trip to the United States, he met with some governors and with some security officials. One whole area that has been underexplored is the implication of what cannabis legalization means to trade. You said it well in here. This is a felony offence in the United States. We’re still trying to wrap our minds around what this will mean when a commercial truck driver shows up at a border, shows traces of THC in their system, and suddenly the vehicle is impounded and the driver is blacklisted.

How will we approach all of these things? These questions all remain to be answered. They all reinforce our view that the time is insufficient. Give us more time on the clock. Recently I asked Minister Morneau if there is flexibility for more time on the clock. I have received no satisfaction that they’re willing to provide any wiggle room.

Senator Plett: Thank you very much for being here, minister. Certainly I’m proud of the effort that my province is making in trying to slow this down and in trying to bring education and some sober thought to this already in Manitoba.

You touched on the fact that Alberta, of course, has no provincial tax, and we’re being told that we will be able to send cannabis through the mail with Canada Post. I’m sure one of the questions that will be posed is: How does the Province of Manitoba or the Province of Saskatchewan collect any revenue when people are sending the cannabis they buy tax-free in Alberta by Canada Post to Manitoba? Do you have any comment on that?

Mr. Friesen: Thank you, Senator Plett, for that question. We’re concerned about this. As the Minister of Finance for Manitoba, I can tell you that my department undertakes enormous effort, even right now, for other products that flow into our province, into this jurisdiction, to enforce tax compliance. Those efforts behind the scenes are enormous because of the modernization of how we get our goods. We understand there will be provisions in place that would disallow the conveyance of cannabis through the mail, but we all know it can be illegal and it will still happen.

We have said as a jurisdiction that we value administrative simplicity in all of our actions. We’ve said that we have too much regulation in this province. We take a view that there’s value in that simplicity. However this runs counter to that. We want to stop the illicit flow of product through the mail, but we also want to stop the flow that would simply take away from those companies in Manitoba that are trying within the legal framework to make a go of a business.

I have a tremendous concern around the issue that you are raising. Let’s understand that this is part of the challenge for us. If we dislike a proposal put forward by the federal government on excise sharing, we can walk away. We don’t have to sign on to that, but in essence we will be trading that administrative simplicity for a “go it ourselves” path forward. It is this challenge that we are trying to weigh.

The issue you’ve just mentioned will be one of the most critical issues in this next two-year path forward that jurisdictions begin to puzzle and scratch their heads over. How do we promote the conditions in our own province for legal companies to undertake activity while trying to address those who will take advantage of mail and move this product into our jurisdictions, in many cases unbeknownst to us?

The Chair: Minister, do you have any closing remarks?

Mr. Friesen: I’ll just say this in closing: Thank you, Mr. Chair, for the opportunity and thank you, senators, for your time.

There are a few things I should say on the bill we were debating in the legislature yesterday. When we make the statement that Manitoba puts safety first, here are a few ways that you can see that in the legislation we’ve brought. The age of use is set at 19, not 18. Our drinking age here is 18 and the age of majority is 18, but I believe there is a signal we send by that level being at 19. There will be no conditions in which marijuana can be grown in your home or principal residence. I think that sends a signal. There will be a hard prohibition of product in schools.

We believe all of these things send signals that it is safety first when it comes to Manitoba, and that is the same view we will take in the discussions that ensue on Monday.

Thank you for the opportunity today.

The Chair: Minister, on behalf of the Standing Senate Committee on National Finance, we want to thank you for your availability. To you, your family, loved ones, happy holidays and good health.

For our next panel we have Philip Cross, Senior Fellow, Macdonald-Laurier Institute. Thank you, Mr. Cross, for accepting our invitation to share with the committee your comments, your opinions and your suggestions. We also have from the Canada China Business Council, Graham Shantz, President. Welcome, Mr. Shantz.

We will start with Mr. Cross, to be followed by Mr. Shantz and questions from the senators.

Philip Cross, Senior Fellow, Macdonald-Laurier Institute, as an individual: Mr. Shantz and I were discussing that it’s going to be a very tough act to follow your previous witness, but we’ll try to have something interesting to say.

I will talk about the Asian Infrastructure Investment Bank in my opening remarks, although a lot of the remarks I will make about the infrastructure bank will have a relevance for the free trade proposals with China that were much discussed this week.

The Asian Infrastructure Investment Bank is a Chinese-founded alternative to the U.S.-led World Bank. It is far from clear why Canada wants to help pivot the world economy away from the U.S. to China. Nor is it clear that there is a shortage of capital in Asia that Canada needs to help finance, especially at a time when plans are being made for a new infrastructure bank to make up for our own infrastructure deficit.

While Asia’s infrastructure needs are massive, so is the available pool of capital as reflected in its large trade surpluses. Many Southeast Asian countries have savings and investments rates of over 30 or even 40 per cent of GDP. Their priority should be finding a mechanism ensuring that capital is employed where it is needed the most.

It is well known that it is not the amount of investment that drives long-term growth but the efficiency of investment. Many Asian countries like Thailand, Malaysia, Indonesia and Taiwan had high rates of investment, leading up to the Asian crisis of 1997, but these investments, often state-directed as part of their industrial policy, did not pay off.

Canada’s enthusiasm to have a place at the table when the AIIB chooses investment bodes ill that investment will be driven by market considerations alone. Canada and other latecomers to the AIIB appear motivated to get a share of the contracts for infrastructure work in the region. This suggests a certain cronyism is anticipated in the process of awarding contracts, with local citizens in Asia ultimately paying more for investments they may not value highly.

Why Asia’s emphasis on infrastructure? While good infrastructure is necessary for sustained growth, maintaining growth beyond the early development stage requires an ability to move into consumer products with the ability to adapt rapidly to changing consumer tastes. Japan and South Korea have auto and electronic companies that have demonstrated that capacity. China and other Southeast Asian countries do not. It’s not clear whether more investment in infrastructure helps make that leap.

Canada’s contribution to the AIIB also appears premised on the idea that China inevitably will become one of the world’s dominant economic powers. This is far from a sure thing. Before the global financial crisis of 2008, its rapid growth was built on exports as it integrated its production into global supply chains.

However, since 2009, it has relied more on domestic demand for growth, most of it fuelled by debt. This is not a sustainable foundation for growth. In The Rise and Fall of Nations, Morgan Stanley’s Chief Global Strategist Ruchir Sharma observed that nations posting increases over 50 percentage points in their debt-to-GDP ratio inevitably experienced a prolonged period of slow growth if not financial crisis. China’s debt-to-GDP ratio has almost doubled from 150 per cent in 2007 to 282 per cent. Mr. Sharma predicts that China faces poor growth prospects over the coming years as a result of its recent debt binges as well as steep population decline. Projecting that China will sustain rapid economic growth seems to echo claims by experts in the 1970s that the Soviet Union would surpass the United States, then in the 1980s that Japan was poised to become the world’s next superpower, and finally forecasts in the 1990s that the European Union would dominate. All these predictions were wrong.

There are other reasons to be wary of increasing our reliance on China as the emerging power in Asia. Its policies are often the exact opposite of what economists usually advocate for growth. Rather than encouraging liberty and the free flow of thought with innovation protected by property rights, China controls its own Internet and social media, steals intellectual property, flouts WTO trade rules, manipulates its currency, initiates cyber attacks on nations and companies around the world, makes unsupported territorial claims in the South China Sea, engages in human rights violations, has rampant corruption, and increasingly pursues a cult of personality instead of fostering democracy.

Even more than infrastructure or investment, growth in emerging market economies beyond the middle income range requires good institutions and governance to protect intellectual property and uphold the rule of law, something that China sorely lacks. To quote Douglas North, the leading authority on the importance of institutions economic growth:

. . . down the road, the Chinese must embed the incentive system in the political/economic structure if they are to continue their rapid development and that will probably require institutions that come much closer to having the adaptively efficient features of Western societies.

It is not clear that the AIIB will help or retard the development of institutions.

It briefly became fashionable among the Davos elite to speak of a new Beijing Consensus on state-directed economic growth as a successor to the IMF’s so-called Washington Consensus. Belief in the Beijing Consensus peaked in 2014 just when the AIIB was being launched in Beijing as well. Confidence in the Beijing Consensus was soon undercut by the sharp drop in growth in emerging market economies in 2015 when slumping commodity prices and a strong U.S. dollar revealed that this model of growth was ultimately just another illusion underpinned by debt, the most precarious sort of growth.

Even the Chinese seem to be losing faith, judging by the increasing amounts of capital local investors are moving out of China, $1.7 trillion in 2015 and 2016, leading China to impose capital controls in 2017. Such capital flight by local investors also preceded the Asian financial crisis in 1997. The steady outflow of capital from China, including an unknown amount into Canada’s housing market, reflects that China’s own leader is skeptical about the sustainability of economic growth and political stability.

It is worth recalling that the breakthrough for growth in many emerging markets in recent decades was not remotely the result of investments made over time by multilateral institutions such as the World Bank. It reflected countries adopting capitalism, tentatively at first in China in about 1978, then in Eastern Europe after 1989, and then increasingly around the world as nations realized it was institutions and not government-directed investments that fuelled economic growth.

I look forward to answering your questions.

Graham Shantz, President, Canada China Business Council: I am grateful to the committee for giving us an opportunity to comment on the important work that you are doing with respect to one aspect of Bill C-63, and specifically your consideration of the government’s proposal to become a member of the Asian Infrastructure Investment Bank. I would like to briefly describe the CCBC as I believe it is important to understand why we see potential benefits to CCBC members and other sectors of the Canadian economy from Canadian membership in the AIIB and therefore why we support Canada joining.

The CCBC is a national non-profit, non-partisan member-based organization that has for 39 years since 1978 and the initiation of economic reforms in China, served as a platform for Canadian companies and public sector organizations with interests in China. Today, our over 300 members from coast to coast to coast are actively working to support and expand their activities with China. Over 70 per cent of our members are small and medium size businesses and organizations.

A number of our members are Canadian educational institutions from big universities like the University of Alberta, UBC or Concordia University, through to Canadian community colleges like Collège LaSalle Montréal or Toronto’s Centennial College, which has established a campus in Suzhou, China.

Of course, we have representation in the engineering consulting sectors and, importantly for the discussion today, in the environmental goods and services sector. In addition, many major Canadian public pension funds and some private Canadian real asset managers are members of the CCBC.

Finally, we are frequently called on by Canadian provincial and municipal leaders to assist in organizing their business missions to China. These missions usually include representatives from a wide range of firms and educational institutions.

I would like to thank the committee for your patience in listening to this background because I think it’s important in terms of the potential benefits from Canadian membership in the AIIB.

This support from our perspective is not unconditional. It assumes that the AIIB will operate to the highest international standards of institutional governance. On this latter point, we believe that Canadian membership at this early formative stage of the AIIB’s existence could provide strong support to its governance structure.

I will give three examples of what I mean by the potential benefits. From my experience in Trade Commissioner Service Canada at various times in my career in public service, and specifically in the trade section in our embassy in Indonesia, I know that Canadian firms and education institutions historically have succeeded in bids in the Asian Development Bank projects, mainly in the area of service provision or services. While this might have changed more recently, I suspect it still is very true and that our strengths are in winning contracts related to training, gender impact analysis, project management, project monitoring and evaluation, and environmental goods and services.

While recognizing that there is a debate over whether or not the AIIB is a development bank or an infrastructure bank, if it operates to high standards in its governance then it is our view that the same firms and organizations competing for Asian Development Bank business would likely have a good chance to win business with the Asian Infrastructure Investment Bank.

A second area of potential benefit is perhaps more tenuous but in my view important. Canada’s public pension funds as well as private managers of real assets are looking to expand their investments into higher growth developing Asian markets. We have no idea whether AIIB-funded infrastructure activities will invite partnering by these Canadian holders and operators of long-life infrastructure assets. At the very least, AIIB activities are likely to trigger necessary policy discussions in recipient countries of AIIB loans and programs about the regulatory and legal structures required to attract long-term capital.

This is the kind of patient capital that Canadian public pension funds hold. Our pension funds have been public in their search for long-term assets in higher growth Asian markets to match their long-term liabilities.

Finally, Canadian premiers and municipal leaders, many of them annually, head up trade missions to China, almost always with a stop in Beijing. While the attraction of what will be the world’s largest economy in a few years is what draws the interest of our political leaders and their accompanying business delegations today, having Canadian membership in an important new Beijing-based infrastructure bank could prove quite important for Canadian businesses and organizations pursuing international contracts in areas of core Canadian strength.

In short, the AIIB would become for some of them, I suspect, a necessary marketing stop for their services and therefore potentially useful for Canadian provincial, territorial and municipal political leaders and their delegations. Thank you very much.

Senator Marshall: Thank you for being here this morning.

My area of interest is in governance, and you both commented on that. Realistically speaking, this legislation will go through. Right now, a figure of almost a half-billion dollars Canadian is earmarked that could be paid out for investment in this bank. I am very interested in governance because of the magnitude of the investment.

As for the governance structure right now, we know that Canada most likely won’t have a member on the board of directors because there are only 12 directors. We’ll have a governor but most likely not a director.

What kind of information will government receive and what kind of information will Parliament receive on this half-billion dollar investment?

I did look through the articles of agreement that were provided to us. Under “reports and information,” the only thing I can see is that there will be audited financial statements. That’s the only type of information.

I have a copy of something called a public information interim policy, but I would expect that as an invester we would get a lot more information. That would include things like information on the projects and on procurement especially because the money is going into this bank with the hope that Canadian companies can compete.

Could each of you talk about the governance structure: what you see as missing and what you see as an adequate governance structure?

Mr. Shantz: As an organization we don’t have deep knowledge of the AIIB or its articles of agreement, et cetera. Our executive director paid a visit to it just to see what its current state was, what they were saying about who they were and what the direction was. I am happy to talk about that.

I’ll make one comment on governance structure based on when I looked at their website, because you want transparency in bidding procedures and in procurement policies. World standards would be you have technical envelopes and you have financial envelopes. You open the technical envelopes to make sure people are competent in what they’re bidding on and finally the financial envelopes in terms of price.

I will pass on what I heard from that visit. Our general observation from what we saw is that as of December 4, the institutions has 129 employees hailing from 36 different countries. The non-Chinese staff are on diplomatic passports, which is not unimportant. It is similar to how I understand the international financial institutions, the Asian Development Bank of Manila in the Asian context and the World Bank in Washington, operate as well.

They’re working with our other IFIs, the Asian Development Bank and the World Bank. Some of their first projects were actually co-funded because, I suspect, the AIIB was relatively lightly staffed as it began. Project identification, project design, project review and project bidding processes were already underway in the other institutions, the Asian Development Bank and the World Bank. They were able to piggyback on that analysis to join and bring their funding capacity to the projects in question.

We take no position on what they say about themselves. The statement they made was lean, green and clean in terms of what their principles were on governance. I don’t have a view on that. I just pass that on.

On the lean side, one of the distinguishing factors with respect to its governance, which is noteworthy, is that the international financial institutions have resident boards of directors. The Canadian executive director in Manila is permanently living in Manila. In the design of the AIIB, the lean meant that there would be no “permanently living in Beijing” directors. They will fly in quarterly, I imagine, in their role as directors.

It’s not clear to me where Canada would sit with respect to representation. Each member does have a role as a governor, which I presume is an annual meeting. I don’t know, but I presume it would be annually.

I understood there’s a possibility that there might be an assistant director for the category of members called “other.” That is to say non-Asian and non-regional. I don’t know. I understood, though, there was a possibility that Canada would episodically occupy one of the director or assistant director roles. We take no position on that and we don’t know. That was my understanding as a possibility.

Senator Marshall: Don’t you think that’s a problem? Here the Canadian government is looking at investing a half-billion dollars in an institution. The legislation is there. They are ready to go and ready to start issuing cheques, and we don’t even know what kind of information we are to get for the half-billion dollars that the government will put in.

We’re talking about China. I think Mr. Cross made some reference to cronyism and cyber attacks. There is little information on whether there’s an ethics committee, what their code of conduct is, what kind of information will be provided on the projects, how the bidding will be carried out, or how the bids will be evaluated.

It seems like we are to hand over a cheque and we’re not quite sure, at this point in time, what exactly we will get back in exchange to make us feel comfortable that at least at the front end we think we are making a good investment. The information is just not there.

Mr. Cross, could you also comment on the issue with regard to the governance?

Mr. Cross: I know even less about the details of governance but I do have a couple of concerns. One is the record of the Chinese in international agreements generally.

I thought it was very instructive, for example, that the United States, obviously the most powerful economy in the world, didn’t want to enter into negotiations directly with China. They came up with this plan under Obama. You might even go back longer than that, probably, given how long it takes to come up with free trade deals. The strategy of the United States was that they would create TPP first, would set the rules of the game and then present a fait accompli to the Chinese. The United States, with all its power, did not want to enter into direct negotiations with the Chinese. They wanted to rig the game a bit before doing that.

I think that gives you an idea of how tentatively we should be entering in. It’s also revealing that the United States is not part of AIIB. There’s a reason for that, and I think we should be cognizant of that.

Another reason the United States is very reluctant to enter into direct negotiations and participation in AIIB is the Chinese record in WTO. I don’t really care what it says on paper about the governance structure. The important thing is this is a Chinese-driven project. The head of it is the nominee from China. We’ve seen, for example, that even in international organizations or institutions that aren’t dominated by the Chinese, such as the WTO, the Chinese just do what they want anyway.

I was at a conference recently, an all-day conference here in Ottawa three or four weeks ago organized by the University of Calgary School of Public Policy, and the word of experts there was that the Chinese just make up the rules, whether it’s companies or countries. If you don’t like it, if you complain and threaten to go to the WTO tribunal, the Chinese just say, “Go ahead, take us. You’ll never get another contract as long as you live.” They just intimidate people with that.

What is the point of rules? China just does what it wants and defies you to do anything about it. I don’t really care what the governance structure on paper is. The track record in these types of agreements is that this is a Chinese-dominated and run institution. It’s going to reflect their interests and needs, and they don’t really care.

Senator Marshall: A half-billion dollars. Thank you very much.

Senator Pratte: Mr. Cross, you presented the decision of the Government of Canada to invest in the AIIB as if it were a pivot from the United States market to the Chinese market, if we chose to abandon the American market to choose the Chinese market. To me it’s not as drastic a choice as this. It’s just the choice of having a foot in the Chinese market. It seems to me you can decide to have a foot in the Chinese market without necessarily accepting every action of the Chinese state.

You can choose to participate in the advantages of the Chinese market and want Canadian companies to participate in Chinese or Asian infrastructure projects and opportunities without accepting everything that the Chinese government does.

Mr. Cross: Right.

Senator Pratte: Isn’t there an advantage that you see to being at the table of this obviously large financial institution rather than being outside and not participating at all?

Mr. Cross: It’s an advantage I find interesting that the United States has passed up, as well as some other major Asian countries. I could be wrong on this, but if I remember correctly I think it is South Korea and Japan.

Mr. Shantz: South Korea was a founding member, as I recall.

Mr. Cross: All right, maybe just Japan then.

I find it interesting that some other major G7 countries, including Japan right next door in China, have decided they don’t want to be a part of this. Obviously they feel they can have the advantages.

Everybody wants to trade with China. It will very soon be the largest economy in the world. We want to be a part of that, but are we being naive in thinking that having a place at the table will really give us a voice when this is a clearly Chinese-driven process?

Senator Pratte: I think the U.K., Germany and France have all decided to be part of it as founding members.

Mr. Shantz: I may be wrong but I am pretty confident. My recollection, senator, is that the first European country to announce its intention to join was the United Kingdom. That then, within about 24 hours, led the French and the Germans to announce and the Italians soon thereafter.

On the issue of governance, because they were first movers they were involved in a process or a category called founding members that were establishing the articles of agreement, the articles of incorporation, and all the rest of it.

I would disagree with my colleague in the sense that, yes, it’s based in Beijing. For the record, I’ve never been to Davos, but I have been to Beijing.

There was the pre-institution foundation debate over what it would look like. Then there was the staffing process when it became an institution. There is now a British person in a senior position and a French one. There was a Korean. I think he had to step down and was replaced by a French person and a German in the very senior levels. I don’t think it’s an accident why they were trying to become founding members.

We’re in a category called potential members, without an asterisk. Those in the category with an asterisk are founding members because they put their hands up soon enough. I would disagree a bit in terms of it being exclusively a Chinese-driven institution. I think some others have found some potential or expect some potential benefits from joining.

Senator Pratte: Agreed. Let me play devil’s advocate here because that’s what I do.

Mr. Shantz agreed that many large western countries are founding members and obviously play a role; but out of the 12 directors, nine are from Asian countries. The Chinese have 30 per cent of the shares and obviously will have a large influence not only because they hold 30 per cent of the shares but because they have a very large influence on the whole region.

What makes you think that the institution, even though there are other shareholders that will have some influence, in fact will not be Chinese dominated for better or for worse?

Mr. Shantz: It will be based in Beijing. It will be focused on Asia. Again I would point to the Goldman Sachs publishing of the expected addition to what they would call the middle class, the affluent class in the world. Between now and 2030, in their estimation there will be a billion new entrants into the middle class. I think it was 88 per cent will be in Asia, and the largest size of that will be in China. That’s an economic reality.

I take no moral position on whether that’s good or bad. I’ll just simply say that appears to be the estimation of a credible institution with respect to where the growth is. We think it would be unwise from a Canadian interest perspective to ignore that.

I lived in China in the 1980s and 1990s. The economist in me says the incremental capital output ratio, which is what my colleague is discussing in terms of the efficiency of translating investment into growth, has diminished in many economies in the world, including in China.

The issue of how the AIIB lends is important. The argument for a lean, green and clean AIIB and Canadian presence there is to ensure that is what it becomes. Frankly, that is what serves the interests of our members the best. If its bidding procedures are like the best standards of IFIs, they haven’t always been great in terms of their project selection. I’ll put that on the table.

If it gets up to current standard, it has the potential to be quite beneficial to Canada, certainly to our members. I would highlight our smaller members, actually, because I think that is where the strengths of what we can do are: if they are overlaying proper procedures on their selections, their project review and their community impact analysis. We have a First Nation member, for example, who has expertise in the area of community impacts. There is an example where you could actually see the potential to bring Canadian expertise to the projects that would come to bear on AIIB.

Senator Pratte: I’m not challenging that. The fear for some may be, for instance, that in the selection of infrastructure projects those will be large infrastructure projects which could be selected on the basis of what infrastructure projects are to the advantage of Chinese strategic interests, for instance.

Mr. Shantz: There is now a formal policy in China, what is now called in English The Belt and Road Initiative. That has now been cemented. That will be, in no small part, funded through China’s very opaque Official Development Assistance program.

Yes, there would be a risk that the AIIB might be more aligned with that. Balanced against that are the staffing structure and the rules, as I understand them, how the AIIB is funded, its board of governors and its board of directors. I’m not disputing that could be a potential outcome. My argument is simply that being in the room is the best way to avoid that outcome.

If you look at how this institution has developed, you can see considerable sensitivity by the Chinese government in trying to ensure that it doesn’t get accused of doing what some developing countries have accused us of doing in the World Bank, the IMF and the Asian Development Bank. It has to be acknowledged that, yes, they are the largest shareholder. Yes, it is based in China. Yes, it has a special category of membership for Asian countries. I can’t dispute that.

I just think that the argument for being involved is the potential economic benefit, as well as trying to bring the best standards of governance to the institution.

Senator Andreychuk: I think the struggle is that none of us know what the Asian Infrastructure Investment Bank will develop into. That’s the dilemma, with the 30 per cent initial holding with China being set in Beijing and with the history that China was really the driver, the influencer and the benefactor of what went on in Asia, Vietnam and Indonesia. That was historic. The power plays are there. We’re facing a new world, so this is a new concept.

Mr. Shantz, you and I have been inside looking out. The World Bank hasn’t always run properly. It certainly didn’t run properly for the benefit of our companies, but it ran for the betterment of development countries to a certain extent. When they started to develop, they wanted a say. We were there to help them on the assumption that we would be heading in the right direction if we could bring all governance countries into a more democratic governance system with perhaps more trading rather than giving, a development thing.

The World Bank has been up and down. It has its own problems. Its structures have changed. Aren’t we putting a half-billion dollars into the infrastructure concept to see where it’s going and to try to influence it as minimally as I think we will be able to? I don’t think we will be a key player. It’s a gamble. We’re putting the money in. We want to see if it works and we can incrementally get some share of it.

I don’t think we should be saying that we will really get the contracts. We will get some service contracts. Your council is strategically placed. Education will get contracts. Traditionally, we’ve been in there for decades with universities and colleges, et cetera. We’ll have minimal benefits initially, but we will be at the table to assess it.

We’re talking about China, but aren’t we really there because we want a foothold into Asia and the other countries, southeast Asia most notably, that in themselves are trying to get their independence away from China? I understood our initial moves were to go into the Asian Infrastructure Investment Bank and the TPP. We were looking for new avenues while we continued with our traditional trade partners.

From a Canadian point of view, was a half-billion dollars too high for the gamble? If it’s done, what are the markers? What are the objectives that Canada will put in? How do we assess whether we continue in it because we can withdraw or we can continue to invest? I hope, if we put the money in, that we have some Canadian markers of where it will do what you say it can do and what Mr. Cross is questioning. Really we’re there.

Just on a side note, the U.K. went in it pre-Brexit but they’ve had a long historical influence in Asia, particularly in Hong Kong, et cetera. Their strategy is a political move to go in more than a financial move, to protect what they already had, the influences and strategic business opportunities they had.

We’re talking a lot of what-ifs. It’s like going to a think tank. If the government is saying it’s going to gamble, I want to know what are the markers of what are our successes in there strategically for the Asia-Pacific. I do not believe for a miniute that we’re going to be getting maximum benefit from the banks. We haven’t in the World Bank, so why would we think we would be in Asia?

The Chair: There are a lot of questions and comments.

Senator Andreychuk: It is a philosophical different approach. Do they agree?

Mr. Cross: I think I understand. It’s revealing that if we set markers we’re basically saying we don’t believe there will be good governance. If there’s good governance of this institution, we should accept we might get zero contracts. If we’re making this conditional, we’re basically saying we are joining to exercise undue influence.

I think that’s wrong. This bank should be fundamentally for the people of Asia, not for us.

Senator Andreychuk: That’s why I’m saying the gamble is this: We want to know if it is going to be really a bank or a development bank. Is it development that we’re after or is it contracts that we are after?

Mr. Cross: It should be for development and we should accept that even if we don’t directly get any contracts from this bank, if it helps the Asian economy become more efficient and develop more, in the long run that will open up the markets and we will benefit from that.

Senator Andreychuk: That may be one of the markers that we use. That’s what I’m trying to say. We should determine why we’re in there and what we believe it can do in a world way but also in a Canadian way.

Mr. Shantz: Thank you so much for your excellent questions, but they are meant for the Government of Canada and not for us.

Senator Andreychuk: True.

Mr. Shantz: I’ll make a couple of personal observations from my experience. If we use those same tests in terms of what is the outcome from the World Bank contracts, the Asian Development Bank contracts, EBRD and the African Development Bank, we would probably find that Canada underperformed from an input/output perspective.

I think we’d find that we probably best performed not so much in creating pressure vessels for power plants where it’s tough to compete with lower cost producers. We probably outperformed in the areas that I identified. Again, I haven’t looked at it recently but I suspect that would be the generalized experience.

Part of this is a philosophical debate. We should be taking great pride in Canada having been involved in the construction of the institution of the post-World War II world. We had the Quebec Conference and the Atlantic Charter. We played a small but important role in the design of those institutions. Some of this discussion is frankly a philosophical discussion over how the economic polls are changing and have changed. There has certainly been a debate over the years about voices on the governance structures of the IMF, the World Bank and the other IFIs to better reflect the weight of certain parties, China obviously being one of those. It’s an important discussion and it is a sign of the changing way in the world economy.

With your permission, Mr. Chair, I’ll make a quick comment because my colleague mentioned the FTA. We’ve been in favour of it. Some people would say that is no surprise, but I want you to understand why. We think there are three reasons.

One is diversification which, as you will appreciate, is a code word for: “Not everybody is as reliable as we thought they once were in terms of Canadian export interests specifically.” In our view you should not ignore the importance of that economy. Canada has underperformed in our exports to China relative to key competitors, Australia being probably the best example of that in terms of our market share of Chinese imports.

The second one is accessing the middle class, getting secure access to the middle class in China with recourse to binding enforcement of those rules. That was the second reason.

The third one is competition. Our beef exports are a western Canadian argument, to be honest. As the tariff preferences for Australia kick in, in their FTA with China, our exporters in some traditional areas of commodities, such as crops, beef and pork, will start to have a tariff disadvantage vis-à-vis a key competitor, that is Australia. That’s what we have said on FTA.

As part of that same philosophical debate the interests of Canada have changed. We have 150,000 Chinese students in Canadian universities, colleges and high schools in Canada. International students are keeping institutions open that otherwise may have had to close. Chinese students are 35 per cent of all international students. U.S. students are 2 per cent. We’re looking at 35 per cent of all international students in Canada coming from China. That’s a real impact coast to coast.

Thank you for your patience, Mr. Chair.

The Chair: Thank you for your clarity and precision.

Senator Andreychuk: I didn’t mean to deflect but I think it is important. I may have used the word markers but I think we started with objectives. We did not go in the African Development Bank. It was secondary to see if we can get contracts. It was to try to get money in Africa to be invested in Africa so that there would be development there because of the overdependence on aid. There are reasons to be in the bank. I just don’t know whether we’ve identified them and are following through. That’s my concern.

Senator Marwah: I have two questions that are primarily directed to Mr. Cross, but I would be glad to hear Mr. Shantz' answers too.

Mr. Cross, I heard you say in the opening part of your comments that you don’t understand why we would want to direct our trade away from the U.S.

From that standpoint, do you really believe that diversification of trade is a bad thing or ia good thing, or do you believe that further concentration in a country that already has more than three-quarters of our trade we should further put all our eggs in one basket, especially given the events of the last year with NAFTA? That’s the first question.

Would you care to comment on why all the other major countries of the world, as I heard from Senator Pratte, like the U.K., France, Australia, Italy, Germany and South Korea, have chosen to join as founding members? Are they just naïve, stupid or both?

I can understand the United States not doing it, but let’s face it: You should know better than anyone else that the U.S. has not done this because it makes any economic sense. It’s pure geopolitics as both these countries fight for global dominance. Japan has not joined, purely because of its historical problems with China. That has nothing to do with any other reason. It’s not to do with economic logic. It’s just pure geopolitics.

Tell me why the other countries joined.

Mr. Cross: First, economic theory says that risk diversification is a good thing. You don’t put all your investments in the stock market. You want to have a diversification.

In practice, it has simply been the history of this country that we have founded. There have been many tentatives to diversify away from the U.S. over time. I remember in the late 1960s and early 1970s there was talk about a third wave, but at the end of the day we had to face the fact that consistently the U.S. is 75 or 80 per cent of our exports. We have to take care of that before everything else.

You say we’re having problems with the U.S. and maybe we should look elsewhere. No, I think we should make sure we get the U.S. right because we’re going to be in a lot of trouble if we don't get the U.S. right.

Senator Marwah: They’re not mutually exclusive, are they?

Mr. Cross: They don’t have to be, but if we don’t get the U.S. right, I don’t think getting Asia right is going to offset it. Put it that way. I just wouldn’t be naïve about how much we stand to benefit from Asia if we don’t get the U.S. right. Perhaps that’s a better way of saying it.

Second, on the geopolitical, are the other countries naïve? Why didn’t Japan? I don’t think Japan was the only Asian one. I was corrected on South Korea, but I have a memory that there is an another large Asian country. Indonesia or somebody else hasn’t.

Mr. Shantz: I think India.

Senator Marwah: India is a founding member. India is very much there.

Mr. Cross: The U.S. didn’t do it for geopolitical reasons because they see China as their main rival. I would say we should be supporting the U.S. in that. They’re the ones right next door to us. How much trade and how many links will we ever have with China, given that the U.S. is right here on our border?

I think there are a lot of other reasons.

The Chair: If you could go directly to the question that was asked by Senator Marwah, the chair would appreciate that.

Mr. Cross: I think I just gave the best answer I could.

Senator Marwah: That’s okay.

[Translation]

Senator Maltais: Mr. Cross, what you said at the beginning of your remarks was absolutely true. We must not be naïve. The investments that Canada is preparing to make in China through the bank are a drop in the bucket. We all know that there are two Chinas: one part of the population is very progressive and the other is traditional. For the Chinese, this bank is set up to serve their own interests and not Canadian interests. Canadian companies in China — and, heaven knows, I have visited a few — are there to serve Chinese interests, period.

You talked about Italy just now, Mr. Shantz. Why is China doing business with Italy? To buy tomatoes that they then sell back to us. The Chinese have a problem because they have a growing population, 1.4 billion people. They have a food problem. They have to look for it outside, and their interests are all that matters. We must not dream in Technicolor. If we cannot come to an understanding with our American neighbours a few kilometres away, how can we come to an understanding with people who are a 20-hour flight away? An infrastructure bank in China may be useful, but it is useful for the Chinese, not for Canadians. What do you think, Mr. Cross?

[English]

Mr. Cross: In my opening remarks I talked about the importance of institutions to development. I quoted Douglas North, for whom I have enormous respect, that China up to now has in some sense done the easy part of development. It gets more interesting when you become middle class, middle income, how you continue the development. At some point they will have to develop better institutions, particularly those concerning law and intellectual property.

My question is: How do we help that? That is the real question surrounding all this. Will participating in the AIIB help China develop better institutions and governance? I don’t think there is an obvious answer to that. How do we encourage China to develop better institutions? At the end of the day, I think Canada’s impact on that is basically zero.

I think only the United States has the leverage that they could influence the development of institutions in China. That’s one reason why I would tend to follow the U.S. lead on this. If the U.S. can’t do that, I don’t think anybody can. I certainly don’t think the AIIB, particularly given that it’s being dominated by the Chinese, will be a force for good in helping institutions develop better in China.

The Chair: Mr. Shantz, do you have any comments?

Mr. Shantz: Maybe I’ll make two. Inspired by the institution my colleague represents, Macdonald-Laurier, my recollection is our national policy was designed to keep British preferential tariffs. There was a 100-year debate over closer integration with the U.S, which led to the election on the free trade agreement that I was old enough to have voted in. That was the 100-year debate over close relationships with our closest neighbour.

We had before that as Canadians chosen to try to maintain the British preferential tariff and ignore the obvious geography. This is me personally speaking, please, not the CCBC. I think there is an important element there.

On diversification, almost 10 years ago when the great recession hit I think peak to trough Canada lost something like 33 per cent of the value of our exports to the U.S. because of the downturn in the U.S. It was 10 per cent of GDP, but our economy only went down minus 3 for a variety of factors, one of which was diversification. I was in Spain at the time. It was Europe and Asia, in no small part China, that picked up the slack for the loss of our exports. I think that is the argument for diversification. That’s me speaking as an economist, I suppose.

I absolutely agree. The quality of food is a real Canadian strength and that is a quality of institutions. That is a quality of dissemination to our farmers of technology. It’s regulatory oversight. It’s the act at the border of CFIA. That is valued in China by Chinese consumers. When some of our members export to China they have to add for 25 cents a little sticker so that consumers can look at it and assure themselves that it is genuinely Canadian and not somebody knocking off the exact replica of that product, which is harmful to their health.

To me, that says everything you need to know. I will not dispute that is also an indictment of the food quality system in China. I’m not. I’m just saying from a Canadian interest perspective that’s of real value. That part of Chinese economy is growing, which is to say those people who would like to have good tomatoes, good lobster or food quality that meets their needs.

We’re diverting from AIIB.

[Translation]

Senator Maltais: You are right, and the Chinese do not accept any old thing, whether it is food, softwood lumber, or raw materials. Canada is very well regarded there.

Mr. Shantz: Absolutely.

Senator Maltais: Of course, the Chinese prefer to import from Canada than from the European Union, for various reasons. Canada must continue to trade with China, of course, but is it necessary to invest in an infrastructure bank that will serve the needs of the second China that I was talking about just now? It is as simple as that. At the moment, the major cities in China, like Shanghai, do not need an infrastructure bank with Canada in order to conduct their business. However, the second part of China, the one representing perhaps 1 billion people, needs foreign capital and that is where the half-billion in Canadian dollars will be used.

[English]

The Chair: There is also another element, Senator Maltais, that you touched on with the WTO. When you were chair of the Agriculture and Forestry Committee different representations were made. Canada did its role with WTO when it came to the COOL program, country of origin labelling. Granted, we were on the right track with that. Other countries disregarded it. A prime example is softwood lumber for Canada.

Senator Eaton: The more I hear about the infrastructure bank, the more I think it’s kind of a half-billion dollar red herring. I disagree with my colleagues when they talk about diversification and moving our trade dependency away from the U.S. Yes, we should do that, but we now have CETA, which we could put some of our energies into. We could be putting more energy into the TPP, but we seem to be avoiding, snubbing and refusing to sign contracts. We could put more of our energy into the ASEAN countries.

Of course it’s true that we don’t have to belong to the infrastructure bank to have a free trade agreement with China, do we? The Prime Minister just went over there and tried to start the preliminary hearings. I guess I’m still stunned as to why we’re spending a half-billion dollars to join a bank in which we will have less than 1 per cent and no representation on the board, in which China has 30 per cent , and I think India has close to 8 per cent or not very much. Russia is the next one. Xi Jinping has just said, “It’s going to be my way or the highway for everybody,” and we’re expecting to have a big say in ongoing projects over there.

Would you agree it’s just a bit of a red herring that has nothing really to do with trade diversification?

Mr. Cross: No. I think unfortunately the motivation, as near as I can understand, is trade. It seems to be there’s an implicit wink-wink around the table that if you join and contribute a half-billion dollars you will get some contracts out of this. As I say, I think that is the wrong motivation. We shouldn’t be in this for ourselves. We should be in this to help the Asian economies grow in and of themselves. If we remain competitive and have good institutions ourselves, we will benefit from that directly or indirectly.

Senator Eaton: Do you think we will have influence at less than 1 per cent with no seat at the table?

Mr. Cross: No. Unfortunately I think we will have influence and I think that reflects the concerns I have about its governance. In return for joining we’re being told, “You will get some contracts.” I don’t know how you can promise that if it’s really well governed. If it’s really well governed, they should be saying, “Okay, thank you, we will use this money for the benefit of the Asian people. That will be our only motivation. You may or may not get contracts depending on whether you’re competitive in your bids.” That should be the way a good institution is governed.

Senator Eaton: If we want to diversify our trade, which everyone around this table seems to want, why aren’t we really going after TPP or ASEAN countries?

Mr. Cross: The best way to diversify trade is to have rapid economic growth in Asia, and we will just be pulled along with that if we remain competitive.

The Chair: Mr. Shantz, do you have any comments on the question by Senator Eaton?

Mr. Shantz: I guess my members will have the potential to benefit if we’re in and not if we're out, as I understand it. I’m not disputing anything you’re saying. I think that’s the issue at debate from our perspective. We see benefit to it.

The more complex benefit is the one I mentioned on public pension funds and on some of our members who are private holders of long-term infrastructure assets. There is potential there but I don’t know how to quantify that.

The Chair: To the witnesses, thank you for sharing your opinions and views.

Honourable senators, we will suspend to go into a 15-minute meeting in camera.

(The committee continued in camera.)