Proceedings of the Standing Senate Committee on
Foreign Affairs

Issue 10 - Evidence

OTTAWA, Wednesday, October 30, 1996

The Standing Senate Committee on Foreign Affairs met this day at 3:30 p.m. to examine and report on the growing importance of the Asia-Pacific region for Canada, with emphasis on the upcoming Asia-Pacific Economic Cooperation (APEC) conference to be held in Vancouver in the fall of 1997, Canada's year of the Asia-Pacific.

Senator John B. Stewart (Chairman) in the Chair.


The Chairman: Honourable senators, this afternoon we continue our work on our reference relative to Canada's relations with Asia-Pacific. We have two distinguished witnesses and I will mention a few of their qualifications.

Dr. William Saywell, of the Asia-Pacific Foundation of Canada, is a graduate of the University of Toronto and has done doctoral work in the field of Chinese history. He has had several positions at Canadian universities. Recently he was the president and a vice-chancellor at Simon Fraser University and before that he had served as vice-provost at the University of Toronto. Earlier in his career he was with the Canadian Embassy in Beijing. He has written extensively on China and on Chinese history.

Our other witness also has a distinguished background. Klaus H. Pringsheim, professor emeritus of political science at McMaster University. There he taught Japanese politics and history as well as Chinese politics and history. He has served for eight years as president of the Canada-Japan Trade Council. He did his undergraduate work in political science at the University of California at Los Angeles and graduated in 1956. He did graduate work at Columbia University in the City of New York and at Columbia's East Asia Institute. He holds a Masters of Arts degree from Columbia and a certificate from the East Asia Institute. He really could not come with better recommendation.

Our third witness is Martin Thornell. He is a graduate of Queens. After graduating he joined the staff of our embassy in Japan where he was the embassy's political researcher. In 1986 he left the embassy to become trade officer at the Canada-Japan Trade Council. In 1993 he was promoted to vice-president of the council, the position which he now holds. He has been involved in various council conferences and has written on Canada-Japan trade matters in the council's newsletter and in other council publications.

Honourable senators, it is clear that we have an interesting meeting before us.

Mr. William Saywell, President and Chief Executive Officer, Asia-Pacific Foundation of Canada: I am pleased to confirm that my organization, the Asia-Pacific Foundation of Canada, which is a creation of the Parliament of Canada, is making plans to assist you in your program in Vancouver which will happen early in the new year.

I will cover very quickly four major themes today, and I hope that will meet your expectations: What is happening in Asia in terms of the region itself, its economic growth, whether that is sustainable, and its political stability; Canada's involvement in the area; briefly, Canadian foreign policy as it now sits, and whether it is the right tone and texture; finally, with your indulgence, a very brief, final, unpaid and unsolicited commercial for the Asia-Pacific Foundation.

When Hong Kong and Macau in '97 and '99 revert to Chinese sovereignty it will be the first time in 400 years that Asia has been ruled by Asians entirely. In many way this is perhaps symbolic of the fact that we are moving toward the Asian century. The changes economically in the globe over the last generation have been dramatic, even over the last decade or less.

I could almost bore you forever with statistics to indicate this. Let me just give you a couple. If you use 1960 as the benchmark, at that time North America represented some 37 per cent of global productivity, and East Asia, the region from Korea in the northeast down to Indonesia in the southeast, represented four per cent. Today both regions represent approximately the same amount of global production, about 25 per cent.

If you include South Asia, the subcontinent, then you are talking about a region with over half the world's population. You are speaking of a region in East Asia which over the past decade has developed economically at double-digit or near double-digit growth year after year. Most economists estimate that over the next decade between a half and two-thirds of global growth will be in that part of the world.

One could go on to provide almost any number of statistics that would sharpen the focus and perhaps underline what I have been saying. I think the real question to get on to is this: Can this kind of growth be sustained? Are we really into a fundamental change in the global economic set of imperatives? I think yes, it can be, not at the same, dramatic, level of annual growth but certainly at high growth, provided one thing: namely, that there is political stability in the region over that period of time.

In the first place I would even suggest to you that your study is very timely, because the economics of the area will be sustained and this region will remain the high growth area of world. There are many reasons for that. The return on investment in Asia is much faster than in North America; therefore, foreign direct investment continues to find the region a very hot market. It is an area in which the impetus for investment has shifted from going to Eastern Asia because of low cost labour to going to Eastern Asia primarily because of market size. Investment is now going into the region because of the growth in consumer markets and investment should be where that market exists.

There has been huge growth, unprecedented in historical terms, in the size of the middle class. The U.S. Embassy in Beijing estimates that the growth in the middle class in China alone has moved from about a million or so in 1985 to 100 million in 1995, and is likely to reach 300 million by the end of the decade. While that is dramatic, you could look at Indonesia or Thailand or several of the other countries, in fact all of the other countries in the area, and say that a relative growth of the middle class is in some ways comparable.

Intra-Asian trade and investment is now growing much faster than trade and investment between us and them. The dynamic, the momentum of the region is now being sustained by their own ability to invest in trade with each other. In fact, intra-Asian trade is growing four times faster than U.S. trade, and U.S. trade is growing faster with Asia than with the rest of the world and, therefore, the U.S. is becoming more dependent on Asia than the other way around.

Investment follows trade. Several of these countries or economies, Hong Kong, Taiwan, South Korea, Singapore, are now all net exporters of capital. The current account surplus in East Asia is now almost the same as the current account deficit in North America. Perhaps most important, and what I feel westerners do not often appreciate, is that they are not dependent upon international capital exclusively; they have enormous capital reserves of their own.

Savings rates throughout this region are much higher than here. In this area the average is in the mid-30 per cent savings rate as a percentage of GDP. In Canada it is about eight per cent. They have enormous capital reserves, and as they fully develop their equity markets, their debt markets and so on, they will be able to more fully mobilize those reserves, and indeed are doing that now for their own development.

In terms of the sub-areas, Southeast Asia -- the Asian nations which now include Vietnam -- is in its own right a market of some 400 million people. Japan I will say very little about because you have one of the finest experts in the country to talk about that. Let me just say that, although it has been going through a very difficult period, it is going through a restructuring that, if it is successful, and it will be successful at the end of the day, will enhance Japan's position in the global economy. One ought to remember that Japan is a world leader in capital formation; the average age of plant is much younger; it is the world's largest creditor nation, and the world's largest donor nation; so the fundamentals are very strong.

The important thing to note is that in the last three years Japan has been turning to the rest of East Asia with lightning speed. In other words, Japan is becoming much more involved in the economic growth and momentum of that region in its own right. And this is absolutely critical in terms of the shift in global economic power.

Let me shift to China and the greater China, the greater China being the People's Republic of China, Hong Kong, Macau. I need not remind you, but I will anyway, that we are talking about a nation of 1.2 billion people. Now that rolls off the tongue very easily and it may be out by 20 or 30 million, but if you look at the market size, if you look at the total population, you would have to combine the economies and population of NAFTA, of the European Union, of Japan and Asia, and then and only then would you get to the total size of the market of the PRC.

Granted, not all of those 1.2 billion people in China are yet consumers of western goods and services, but increasingly, as I indicated earlier in terms of the growth of the middle class, more and more of them are. As a wag might put it, 1.2 billion times anything is a lot.

If you look at Shanghai, which may very well become the financial centre of Eastern Asia within the next decade, and you take a 500 kilometre corridor away from Shanghai, similar to the Toronto-Montreal corridor, you are talking about a market of 200 million people. Well, I exaggerate; it is 193 million; but that is changing every day too, so that is just an enormous size of market.

If you look at China over the future, the positives are very clear: unprecedented market size, unprecedented growth of middle class. When I use the term "middle class", do not think of it in terms of a specific dollar amount that we might use in North America, but rather as a family with the disposable income to buy western goods, western services and, increasingly important, to travel to the West, to study in the West, to come as tourists as well. It has an endless pool of low-cost labour. It has sophisticated financial centres: Hong Kong in a year, and Shanghai. It has had an overheated economy, which up to a year or so ago I would have said was a danger point in China, but it appears that they have had a soft landing.

In the first six months of 1996 both GDP growth and inflation were down under double digit for the first time in several years, and that is very important, they have done a good job in that regard.

If you look at the greater China, if you include Taiwan, Hong Kong and Southeast Asians of Chinese ethnic background, you are talking about the third largest economy in the world. In all of Asia, and I would say particularly Chinese-based Asia if I can put it that way, networking is how business is done. Networking is extremely important and, therefore, China, with the network of ethnic Chinese business leaders in the rest of Asia, is an extraordinarily important economic entity in its own right.

Let me remind you how important the Chinese commercial leadership is in Southeast Asia. In Malaysia, for example, Chinese represent 30 per cent of the population but 50 per cent of the economy. In Thailand they represent 3 per cent of the population but 60 per cent of economy. In Indonesia 4 per cent of the population, 70 per cent of the economy, and the same in the Philippines.

So you are really talking about a region that goes well beyond the political borders and, as you know better than I in this day of global economic integration, borders are so often meaningless in any event. The region as a whole will, the World Bank estimates, grow at 7.7 per cent real growth over the next decade, over twice the rate of the rest of the world. It is moving from an export-driven to a consumer-based economy.

I am positive that economic growth will be sustained and that this area will become and remain the central gravity point of the world economy, unless it is undermined by political instability.

I would be happy to try to address questions you might have in this area, but let me just point out three areas in particular that are of concern.

North Korea clearly is still one of the most volatile and potentially dangerous points in all of the world. It has a desperate economy, and a desperate government, when backed into a corner, could result in a military confrontation with the south or perhaps a sudden collapse of the regime, which would be far more detrimental to stability in the peninsula than, say, East Germany's change could be upsetting of stability in Northeast Asia.

Indonesia has in many ways done a splendid job in terms of its economic growth over the last many years, but they are facing, probably fairly soon, a succession challenge, and the post-Suharto era could be very troubling indeed. With a country of that size and the geographical spread and influence, political instability in Indonesia could have a major impact through Southeast Asia.

Again I would argue that the key is China. There are two scenarios for China, other than the continued modest growth; one is extraordinary growth in terms of their power base, along with other issues of continued problems in the Sino-U.S. relationship, a resurgence of Chinese nationalism, with political infighting in China to accentuate these differences, and you could have a China which asserts its authority in the region even more forcefully than it does now, and that could be destabilizing. Believe me, after the Taiwan Straits missile crisis of last year the neighbours of China have some unease about the country, and, indeed, by far the greatest arms race and growth in the world is in East Asia today.

That is not something I predict, however; nor do I predict the second scenario, although it is more likely as a possibility, and that is political instability driven by their economic difficulties. They have huge state enterprises which they cannot immediately privatize and which are an albatross around their economy; two hundred and fifty million people depend in one way or another on these state enterprises. There are perhaps 100 million migrant labourers, which is potentially socially destabilizing. There is environmental degradation that will undermine the sustainability of their economy, if they do not get control of it quickly. There is growth in regional power and regional disparities, and corruption that is pervasive. They are trying to do something about that, but it is very difficult to do.

There is also a succession crisis, not in terms of the person to lead after Deng Xiaoping dies, but a succession in a China that will be much more difficult to manage. That is a succession from one value structure, which they have thrown into the dustbin of history, Marxism, Leninism, Communism, to a new value structure, call it the rule of law or whatever you will; consequently, China is in that transition today where there is no value structure. I would argue that in any society a value structure is necessary as the cement of the society. The slogan in China today is, "To grow rich is glorious," but that is not a value structure that keeps a society and a civilization together.

Sino-U.S. tensions are very destabilizing; while one could, in a second Clinton administration, see a will in the United States to have a more clear-cut China policy and an Asian policy, there are no clear signs of that happening as yet. Chinese-U.S. tensions, by definition in Congress, are not good. A third of Congress are by definition against abortion; by definition, almost a third of Congress at any time is going to be negative toward China. There are structural issues, and if I had time I could go on to say there are similar structural issues and attitudinal issues in China that make it difficult for China and the U.S. to see eye to eye in the way they must.

Let me just sum up the political stability question by saying I do not predict political instability. I predict continued economic growth, which will make this region the most dynamic area of the global economy, and reasonable political stability; but it would be foolhardy for anybody, especially those making foreign policy in any country dealing with China, or Indonesia or the Korean Peninsula, not to realize that there are also a lot of mines out in that minefield that could blow us up.

Let me conclude on two points. Where do we stand in terms of Canada's involvement in this area? Some 85 per cent of our trade is still with the U.S. In fact, that increased with the emergence of NAFTA. The involvement of Canadians in Asia is spotty. There is still across this country an unevenness in terms of people who recognize the importance of Asia and are prepared to go into Asia for the long haul, which is what you must do if you want to trade and make money in Asia.

What is our trade deficit with the region? For about every dollar we export we import a $1.24. Japan still accounts for about half of our exports, and, while there have been good changes, it is still relatively dependent on commodities and semi-processed goods. Bearing in mind that trade does follow investment in the global economy, our investment is the lowest among the G-7 nations and our market share, while absolute volumes have increased, has declined from about two per cent of Asian imports a few years ago to about 1.4 per cent last year.

Despite greater Canadian involvement, and despite changes in Canada which I think are important to recognize and some of which we have not fully exploited, we have not been as involved in Asia as we could be and as we should be. When I say social changes, I am thinking of the dramatic change in the social texture of Canada, in which you have three or four cities with ten per cent of the population of Asian ethnic background over 10 per cent; in Vancouver it is over 20 per cent. Our people from Asia know Asian cultures, languages, and customs and could be important trading partners for us. We should be doing more with them to penetrate these markets, to understand these markets.

Our air links with Asia out of Vancouver, for instance, have jumped from some 37 a week to 89 a week; in Toronto they have gone from 3 to 10, and there are even a couple of direct flights out of Calgary. Thirty per cent of the tourists in this country come from the region, and 50 per cent of the students in this country come from the region. These ties are very tight; they are very good; but our trade does not represent as positive a sign of our involvement as it should. The truth of the matter is that we need them more than they need us. As you know better than I, we are a nation totally dependent on trade, and that is the area where trade and investment must grow rapidly.

If I had more time I would cite some examples that perhaps are not commonly thought of, where Canada has some really wonderful opportunities in Asia. Perhaps they are not the ones you think of, though they too are good -- telecommunications infrastructure and so on; but there are three areas: environment, agri-food and education and training. Environment is a sunrise industry, and if there is any region in the world that will invest in environmental clean-up and buying western goods and services, in which we are a major, credible and excellent source, it is Eastern Asia.

Agri-food. If there was ever a time in the history of this country in which one could be positive about the farmer and all the other agri-food chain it is now, because with the land going out of agriculture in Asia, and with the enormous growth of the middle class there, there is a move from basic goods to meat, which is a far greater use of land per acre and so on, and they are now buying everything from processed foods to fast foods to health foods. If there was ever a time to be positive about the agri-food industry in Canada it is right now, and it is our linkage to Asia.

Finally, education and training. We are talking about a part of the world in which economic growth has been dramatic, as I have indicated, but human resource development has not kept up; for instance, some of these countries need 10,000 or 20,000 new engineers and are producing 2,000 to 3,000. Because I come from an educational background, I hope you will forgive my bias, but no country in the world has a better educational and training structure than we have; it is competitive in terms of prices and is delivered in a safe, friendly and hospitable environment.

The Asia-Pacific Foundation of Canada in the last couple of years has recognized that, but it has also recognized that we have been losing market share to the Australians, in Asian students coming to Canada, simply because the Australians have been marketing. Therefore, in cooperation with the Government of Canada we have now set up seven Canadian education centres for foreign students -- and this year we will add India and perhaps Mexico to make it eight or nine -- on a fee-for-service basis so that any institution, any ESL school that is privately run, say in downtown Toronto, or a secondary school in Charlottetown, or a university in Alberta, can pay us a fee and market.

In the two years that we have been doing this we have brought in 10,000 more students than would otherwise have come. Each student drops $30,000 a year into the Canadian economy. That is value-added of $300 million just by the beginning of marketing. For six months we have been looking for corporate training, that is to say to have our institutions give training to companies and government agencies and so on in Asia; we have done $2 million of business in that six months.

The most important thing in my mind about marketing Canadian education and training is not simply the economic impact now, but it is the strategic importance. By definition, the young women and men who come from Asia to study in Canada, short term or long term, ESL or post-doctorate, are the sons and daughters of the elite. They go back and they are our immediate trading partners, government partners and so on. What could be more important than to develop this market?

As for Canadian foreign policy, the basic contours, I would argue, are correct and have been roughly since the Pearson period. There have been changes in nuance and so on. We can get into that in the question period. There are some slight changes I would make, but fundamentally I think Canada acts well in this area; but we must promote the economic development.

My 30-second unpaid, unsolicited commercial is that, as a creature of the Parliament of Canada, the Asia-Pacific Foundation of Canada, which runs the globe foundation that develops environmental business with Asia, which runs the Canadian education centres, has the APEC Study Centre for Canada -- and you have been given materials that are publications -- and does research on APEC and Asia-Canadian relations, is facing a tough challenge, as all agencies are which have been dependent on government resources in the past. We are happy to face that challenge by charging fees for service and doing other things, but we will still continue to need some government support and I hope that later perhaps we can talk about that, if not here, then in Vancouver, and I urge your support.

Mr. Klaus Pringsheim, President, Canada-Japan Trade Council: The Canada-Japan Trade Council is a non-profit organization formed 35 years ago and originally headed by Colonel Robert L. Houston of Ottawa. I have been president since 1988, when I retired as professor of Japanese Politics from McMaster University in Hamilton, Ontario. The main purpose of the council today is to promote good trade relations between Canada and Japan by helping Canadian companies to enter the Japanese market, to identify potential trade partners in Japan and to achieve success in publicizing and marketing their goods.

When the trade council was founded, the emphasis of its activities was on helping Japanese companies to establish themselves in the Canadian market at a time when Japanese businessmen lacked the information on how to operate in Canada. However, since the '70s this has been totally reversed and most of Japan's large companies are very much at home in the Canadian market today and do not require the council's services. The same also applies to Canada's major companies; however, Canada's small and medium enterprises still need help in familiarizing themselves with Japanese business practices. There remain the problems of the great distance from Canada to Japan and of the cultural and linguistic differences, and the council can be of some help there.

The council publishes a bi-monthly newsletter highlighting major events in the bilateral economic relationship, and this is distributed to federal and provincial officials and other interested parties throughout Canada. The council also organizes periodic trade promotion conferences in major cities throughout Canada. During the past ten years we have held more than 20 such conferences in nine of the ten provinces and have spread the word on the bilateral investment and trade opportunities in 17 major Canadian cities from Vancouver to St. John's, thus creating opportunities for networking by Canadian entrepreneurs both with their counterparts from Japanese companies operating in Canada and with officials from the federal and provincial governments, visiting businessmen and officials from Japan, as well as businessmen from their own and other Canadian provinces who have had experience in marketing their products in Japan.

In organizing these conferences we have had the positive cooperation and advice of both federal and provincial governments, of various trade and business associations throughout Canada, as well as of Japanese diplomatic missions and trade organizations, all working toward our common purpose of supporting and enhancing the bilateral trade between Canada and Japan. The proceedings from all of these conferences have been published by the council and widely distributed to interested parties throughout Canada.

The council has also commissioned, edited and published a wide variety of studies on various sectors of the economic relationship between Canada and Japan. These studies include such subjects as coal, food products, construction materials, pre-fab housing, the Japanese software market, the services sector, tourism, minerals and mining, fisheries, agricultural products, lumber and wood products, processed foods and investment, among others. The council has also periodically published overall accounts of the trade relationship -- exports and imports -- as it has developed over the last four decades, starting at a very moderate level in the 1950s and '60s to the 1970s, when Japan became our second most important trading partner after the United States. Japan has remained in that position for the past quarter century and is certain to remain there into the twenty-first century, if past trends prevail.

I will turn now to recent developments in Japan. We have the ongoing political changes which inevitably will have some impact on economic developments as well. The one point I would make here is that a change in party alignments in the National Diet, in the prime ministership or in the composition of government coalitions -- there have been four different coalitions since the summer of 1993 -- will not significantly affect Japanese foreign policy, trade policy or the general bilateral relationship with Canada. What is more likely to affect the trade picture is a condition of Japan's domestic economy, budgetary measures, the yen-dollar exchange rate, or diplomatic upheavals in Japan's relationship with her neighbours in Asia, Russia, Korea, China, Taiwan and Southeast Asia. Incidentally, it is not my view that Japan will go to war over Takeshima-Tokto or over the Senkaku-Diaoyu island disputes. Both China and Korea are very important to the maintenance of peace in East Asia and I believe we can rely on the foreign ministries in all three countries not to let these territorial disputes get out of hand.

The yen-dollar exchange rate is another matter. When the yen stood at 123 yen to the Canadian dollar this favoured Japanese exports, which lowered their price abroad while discouraging Japanese imports since it made foreign goods expensive in Japan. When the yen rose to 65 yen per Canadian dollar that had the opposite effect of encouraging the importation of suddenly cheap foreign goods while discouraging the export of Japanese manufactured goods to North America. Japanese cars and VCRs were suddenly much more expensive and Japan felt compelled to transfer a significant percentage of her domestic industrial production to countries in East and Southeast Asia, where labour, real estate and industrial operating costs were significantly cheaper, thus raising the fear of the hollowing out of the Japanese economy. However, before this trend went too far, the exchange rate was again reversed earlier this year, and when I last checked the yen it had fallen back to almost 85 yen to the Canadian dollar, which once again drives down the price of Japanese manufactured goods abroad and increases the price of goods imported to Japan.

In spite of these extensive fluctuations in the exchange rate and the continued political upheavals which saw four prime ministers take power in a little over three years, Japan's economic relationship with Canada seems not to have been severely affected. There has been some movement in the direction of deregulation and the price consciousness of Japanese consumers has been sharpened. However, Japan continues to be the world's third largest import market and the primary source of foreign investment worldwide and Canada's trade relationship with Japan has not been adversely affected by the events of the middle '90s up to this point. In fact one of Japan's misfortunes in early 1995, the great Hanshin earthquake, has led to a significant increase in Canada's share of the Japanese market in housing and building products.

To cite some of the most significant figures, Canada-Japan bilateral trade has increased from 17.7 billion Canadian dollars in 1990 to 24.1 billion Canadian dollars in 1995, and according to Canadian statistics the Canadian trade deficit, which stood at 3 billion Canadian dollars in 1991, has been brought down to a negligible 93 million Canadian dollars, so that as we speak our bilateral trade with Japan appears to be virtually in balance.

According to Japanese statistics, on the other hand, Canada has a hefty surplus of some 3 billion on a balance of payments basis. It remains true, as it has been for decades, that Canada's exports to Japan are mainly resource materials: agricultural products, coal, lumber, pulp and paper, metals and animal products, with only some five per cent in the area of manufactured goods and perhaps another 35 per cent of processed and value-added goods. I would point out, however, that the share of manufactured and processed Canadian exports to Japan has been increasing steadily, if ever so slowly.

Our principal exports to Japan are lumber and plywood, pulp and paper, coal and mineral fuels, oilseeds and cereals, animal products, fish and seafood, base metals, miscellaneous products and, finally, manufactured goods at 4.6 per cent of the total.

This has been the basic pattern for decades now, although the 60-40 relationship between resource exports on the one hand and manufactured, processed and value-added goods on the other hand represents a steady improvement during the last decade as Japan has increasingly imported finished and processed goods from all over the world. It is unlikely that the trade mix will change much in the future, since Japan will continue to need and want our resource products, such as coal, food, fish, lumber and base metals, and since we do not necessarily compete that much with the United States and Europe in the manufactured goods sector. However, I would anticipate that there would be further increases in the share of manufactured and processed goods exports to Japan depending partly on the efforts of our exporters and the economic and financial factors affecting the Japanese market.

Apart from the trade mix, I would like to emphasize the tremendous importance of the Japanese market to Canada's overall trade performance. For almost 25 years now, Japan has been Canada's second largest trading partner after the U.S. Our two-way trade has risen from just over $1 billion in 1969 to more than $24 billion in 1995 and, while it may fluctuate $1 billion or $2 billion in any given year, and 1996 may be a case in point, we may well reach the $30 billion level by the year 2000. This being Canada's Year of the Asia-Pacific, and given the increasing importance of Asia as a market for Canadian goods, I would point out that half our exports to all of Asia, which stand at $24.039 billion for 1995, are in fact constituted by our exports to Japan, which account for $11.857 billion. Our exports to Japan are equal to our combined exports to China, Hong Kong, Korea, India and several other Southeast Asian countries. Our exports to Japan are also higher than our exports to the United Kingdom, Germany, France and Italy combined. I feel that in our enthusiasm for Asia as a whole we sometimes tend to forget how big a part of our Asian trade is actually our trade with Japan.

One reason why the Canadian general public knows little about our trade with Japan is that Japan does not get much coverage in the Canadian media. Our major newspapers, such as The Globe and Mail, do not maintain offices or correspondents in Japan, but rely on reprints from the U.S. media instead. Canadians therefore assume that the problems facing the U.S-Japan trade relations apply to Canada as well. This makes it very difficult even for otherwise well-informed Canadians to get accurate or adequate information about Japan. Myths about Canada-Japan trade, to the effect, for instance, that the Japanese market is closed to Canadian goods, therefore persist unrefuted and are reinforced by statements based on this lack of information. Since the expense of posting a correspondent in Tokyo is extremely high -- I would estimate it as close to a half million dollars -- this situation is, regrettably, unlikely to be remedied any time soon.

In conclusion, I would emphasize the benefits which Canada is deriving from our largely smooth and harmonious relations with Japan. There are no major disputes between the two countries; we cooperate in a most friendly way with Japanese officials in various ministries and frequently send Canadian officials to Japan as well as receiving Japanese officials here in Canada. Members of the Japanese Imperial Family and ministers of the Japanese government have been frequent visitors to Canada, and our prime minister, as you undoubtedly know, will be going to Japan in November of this year.

There are few trade frictions, although of course in a trade relationship as large and diverse as ours is with Japan there are bound to be a few points of contention. We would like to see a removal of the Japanese tariff on spruce, pine and fur lumber. This matter has been at issue for the better part of a decade but remains unresolved. We would also like to see a reduction of the Japanese tariff on canola oil so we could process the canola in Canada, but there are crushing plants in Japan which do not want to lose their business. We would like to see Japanese taxes on our whiskey lowered and would hope to increase our sales in a number of other product categories. Conversely, the Japanese would like to see a remission of our tariff on Japanese automobiles, currently at eight per cent, since they feel that they make a substantial contribution to our economy with their plants in Ontario and hence are deserving of sharing in the benefits of the Autopact. Nevertheless, we manage to negotiate with each other on such differences and resolve them to our mutual satisfaction, mostly without having to resort to official complaints to the World Trade Organization, although on whiskey, which is an important subject in anybody's life, we did go to the WTO.

Among the great benefits from this relationship I would cite the fact that Japanese affiliates in Canada employed some 38,851 people during 1995, and that figure will continue to rise as the automotive investments in Ontario are increased in the coming months.

I would be remiss if I did not mention the very favourable development of tourism, which saw some 667,000 Japanese tourists come to Canada in 1995 -- mostly to British Columbia and Alberta of course; they do not come to Ontario. Japanese tourists remain the biggest spenders per visitor, and thus this is another great benefit to the Canadian economy. Trade between Canada and Japan creates employment in Canada and thereby allows us to upgrade our infrastructure.

Let me finally say that neither the internal politics nor the foreign policy of Japan significantly conflict with those of Canada, and that makes for a most friendly and harmonious relationship in trade and diplomacy.

I would now ask our vice-president, Mr. Thornell, to tell you about some sectors which look particularly promising at this time.

Mr. Martin Thornell, Vice-President, Canada-Japan Trade Council: I want to add some details on a few of the things the council does in specific areas -- things that we have focused on recently. We try to select sectors or markets that offer great potential for Canada, and the two sectors that we have done a lot of work on of late are building or forestry products and computer software.

Forestry products now represent about 40 per cent of our exports to Japan; that includes lumber, pulp, paper and value-added wooden building products. These exports have boomed in recent years for a variety of reasons. For one thing, housing construction has been very strong in Japan, and it is estimated that there will be about 1.5 million housing starts in Japan each year for the better part of this decade; and Canada is very actively involved in a lot of that. Canada has played a major role in promoting the construction of houses in Japan using the 2X4 construction method as opposed to the traditional post and beam method, and that has stimulated a lot of our lumber exports to Japan. As a result, Canada is now a leading supplier of these products to Japan. We have also been very active in promoting prefabricated or manufactured housing in Japan, and Canada is the number one source for that type of housing as well.

All of this has happened largely because the market is great in Japan; but also important is the fact that Canadian mills, prefabricators, and building products manufacturers, particularly in British Columbia but not exclusively, have educated themselves and learned what the Japanese market is demanding and have figured out how to meet Japanese quality requirements. In addition, there are labs in Canada now certified to test products destined for Japan to ensure that they meet the relevant building and fire codes. These are some of the things that have contributed to our success in this sector.

With respect to computer software, some people are surprised to hear that we are very active in that market in Japan, but the fact of the matter is that, while Japan is a tremendously competitive manufacturer of computer hardware, Japan lags in the field of software, and Canada has developed a reputation in Japan as a reliable and innovative supplier of software. The latest statistics we have, from about a year ago, show that we have sold about $100 million worth of computer software in Japan, which is quite impressive.

Let me touch briefly on investment. Of course, Japan is a significant source of portfolio investment in Canada. They have significant holdings of Canadian stocks and bonds. With respect to direct investment, Japanese overseas investment fell off in the early 1990s because of the recession in Japan. It has now begun to recover, and although, as Dr. Saywell was saying, much of that investment is directed at Asia, nevertheless North America is still attracting the largest share, and Japan is the third largest source of direct investment in Canada with a cumulative total in excess of $12 billion. The Honda and Toyota investments in southern Ontario of course are the largest. Those plants are now undergoing expansion to the tune of about $1 billion, and it is expected that the expansion will add a lot of jobs in both plants.

Conversely, Japan is not a destination for a great deal of foreign direct investment for a variety of reasons, and, although Canada has consistently been among the more significant investors in Japan, nevertheless the stock remains quite low. Just last month, during a visit to Canada by a high level Japanese mission, a group of their executives travelled across the country with particular focus on the Canadian high-tech and agri-food or processed food industries. They were looking essentially for investment opportunities and joint venturing opportunities, and we are optimistic that that mission will come out with favourable findings which will serve to stimulate further activity in those sectors, including investment activity.

Senator Stollery: Mr. Saywell talked about the middle class in China consisting of about one hundred million people. That is an enormous number. I would like a little clarification on that. I believe you also said that those people buy imported goods; but are there actually statistics on that? How do you define these things? How does it work?

The reason for my question is that, having on occasion met members of the scientific community from China, I found that they did not seem to have much money at all. Their pay was very low, even though if they had worked in the west they would have been well paid. So I would like a little clarification of what actually the middle class is. When I meet an astrophysicist, who has $5 till next Friday, is he a member of the middle class? Just what is this all about?

Mr. Saywell: I am not an economist, and I cannot give you a definition out of my own discipline. Moreover, in any of the estimates I have seen, whether for China or any of the south Asian nations, there has been no clear definition. I made that point in my remarks. It is not a question of being able to identify the amount of yearly annual income, or that kind of thing; it is the ability to purchase consumer goods, imported western goods, services, and travel, and the ability to send their children to study abroad, and so on. Perhaps you have met people who are basically on the state payroll; almost by definition those people are not well paid. In fact, in terms of potential social instability, as in any society those salaried groups are most vulnerable to hyper-inflation, and until this year that has been the case in China. Those particular people do not have money. It is rather the privatized side of the economy, the individual entrepreneurs in the major urban centres and coastal centres, who are by definition the people with wealth.

Senator Stollery: You said the U.S. Embassy had calculated that there were a hundred million people; I wonder how they do that calculation. A hundred million people, even in China, is a huge number of people, especially in a country that has such a rural structure. It makes me wonder where they get these figures; I am sure they are legitimate, but I would like to know a little more about it.

Mr. Saywell: I don't think anybody can call them "legitimate"; they are estimates, they are guesses. If you look at the areas of concentration, only seven per cent of China is arable. We all think of China as this great rural country. It is not. Just look at the concentrations of economic growth in the past decade; I mentioned, for instance, Shanghai, with 193 million people. Almost by definition that is an area of very rapid growth and wealth, but it is not comprised of civil servants.

The Chairman: Is it correct to assume that they are suffering urban sprawl into their best agricultural lands?

Mr. Saywell: Indeed that is so. They have lost a considerable amount of their arable land to urbanization, and are losing more to rural industry; small township industry has been a major growth, and they are losing land to pasture, because of the increased desire for a meat diet, and they are losing land to environmental degradation. In north China, and even in the City of Beijing, the nation's capital, arability will not be sustainable over the next ten years because of the dramatic drop in the water table. They are repeating the Grand Canal story in their history by trying to move water from the Yangtze River to the north. They have dramatic problems of this kind. So the answer to your question is, "Absolutely."

Senator Grafstein: I have several questions of the witnesses, but I will try to be succinct, Mr. Chairman.

First of all, let me deal with Japan. It strikes me that we are in a mature trading relationship with Japan, unlike with the rest of Asia. Looking at our current trade dependency on the United States, if we wanted to quickly wean ourselves away from that over-dependence on the U.S., it seems to me that we would have two choices: One choice would be Europe, with all the problems that would entails and the other choice would be to go immediately to Japan.

What would stand in the way of Canada immediately looking towards a free trade agreement with Japan as a way of cutting through a lot of this? I ask that because some of my experience on the China trade has been that, even when there are willing hearts on the Japan side, they still have tremendous indirect trade barriers to Canadian exports.

I will give you one example. If you want to export household electrical products, you will find that their electrical requirements keep shifting; they do not keep the rules in one place but keep moving them around to protect their trading companies.

I understand the difficulties on the Japanese side, but I am really interested in whether we can make a breakthrough by going to a full-scale free trade negotiation with Japan.

Mr. Pringsheim: I will try to be very short on the free trade agreement side. There are people who have mentioned this subject and this possibility. I am not sure whether this would be received favourably in Japan or not, but there are free trade advocates in Japan; the Japanese claim to be in favour of free trade, so they should be in favour of free trade with Canada. I do not think we have ever raised this in a very positive way with the Japanese, perhaps because we feel that if we were to have free trade with Japan we would be buried under an avalanche of Japanese goods that would descend upon us because we could not stop it.I think that is a wrong assumption; I do not think that that would happen. But I think the person you should talk to about this is Simon Reisman; he will give you a good answer. He knows about free trade agreements and what the pitfalls involved are.

Senator Grafstein: I would be interested in your view. You have given us a terrifically comprehensive examination, sector by sector, almost area by area, of trade; obviously you have looked at it from a sectoral standpoint and an industry standpoint and almost from a product line standpoint. On the other hand, I have just looked at it quickly, although I have thought about it for some time, but based on my own experience I do not see the problem.

Mr. Pringsheim: No, there is not a big problem.

Senator Grafstein: As a matter of fact we have an advantage here over the United States, because the United States will never enter into a free trade agreement in the foreseeable future. This to my mind gives us a competitive and comparative advantage.

Mr. Pringsheim: Perhaps another way to answer you is to say that we have in effect virtually a free trade agreement with Japan, because there is very little that is still under tariff, and I have mentioned some of those things.

Mr. Thornell: When this idea has been floated in the past, and it has never been officially discussed as far as I am aware, the Japanese have not shown tremendous enthusiasm for it; and in recent years Japan has very much committed itself basically to multilateral trade negotiations, and then, even more recently, to the whole APEC process. That might be the stumbling block to a straight bilateral discussion with Japan, because there are certain free trade commitments that have been made as a result of the APEC process, and I think Japan's commitment to those might get in the way of doing something bilaterally.

With respect to the Canada-U.S. Free Trade Agreement and the more recent NAFTA, the Japanese have never expressed strong disapproval of those arrangements, but they have always said that it was their hope that Canada, the United States, and North America as a whole, would more fully commit themselves to multilateral trade liberalization, and then, more recently, to the trade liberalization that is occurring within APEC.

Senator Grafstein: I did a review on this about a year ago, so it may not be current, but, looking through the product lists here, the only place I can see a problem is in certain segments of the agricultural end of it, and we could overcome that because we are used to it. In other words, there are certain products in Japan that are highly protected; beef is one example and there are others, but we do not have a problem with rice, for instance.

So, as we go through even the agricultural products, we are in very good shape save for beef, and that can be solved. When you look at practically everything else we virtually have a free trade agreement with them without the political will. It strikes me that if the problem is investment, trade, energy and so on, and a bridge to Asia, this to my mind is the most solid bridge and is the way to go with the least consequences for us and a tremendous trade advantage over the United States.

Mr. Thornell: Yes, I think you are right. Given the size of the Canada-Japan trade relationship, the problems we have are so few as to be virtually non-existent. You mentioned beef; that market has been opened up in Japan and we are doing quite well in it. The difficulty we have in the Japanese beef market now is that the Americans and the Australians are throwing phenomenal amounts of marketing money at that market and we are not successfully competing just at that level.

Senator Grafstein: Our problem there is not the United States; our problem is really Australia.

Mr. Thornell: That is another issue, but certainly you are correct that we virtually have free trade with Japan. Japan's tariff level is 1.9 overall, I think, and ours is slightly higher; so it is not a big obstacle.

Mr. Pringsheim: I do recall that, when NAFTA and the Canada-U.S. Free Trade Agreement were being negotiated, the Japanese were very much worried that they were going to be locked out, and they are now relieved because they see they are not in fact being locked out.

Senator Andreychuk: If I may turn now to China, Mr. Saywell, in your presentation you indicated that the Chinese are moving from a Marxist-Leninist outlook to a market economy type of philosophy and are now in between and do not have a value system. From most of the discussions I have had, particularly on what leads to political instability, I do not believe the Marxist-Leninist imprint in China has been that strong. I think traditional values have always been there and continue to be there; to a certain extent they confront our values of individualism, and so on, and that may be a greater threat to instability than the lessening or the strengthening of the communist imprint.

Mr. Saywell: I can accept the fundamental premises you make and still argue that they have to evolve a better sense of what their value structure is. I think the conclusion is still the same. Scholars may debate the extent to which communist values were deeply or superficially embedded, but certainly in the past decade or more the speed with which they have overturned many of those values and have reverted to open discussion and Confucian values would support your basic argument.

Be that as it may, from 1949 to 1979 they had a highly authoritarian political Leninist state and a basically Marxist economy. Consequently, although they now have a mixed economy which is driven primarily by the market economy side of the mixed economy, they still retain a fairly heavy hand from the point of view of their Leninist political authority. In other words, they have not evolved much in terms of political freedom, and yet, because of the economic change, their people have a greater choice and variety of life style, and so on.

So they are in between. In the commercial sector of their society they are moving toward a rule of law to develop international equity markets; to go into the World Trade Organization, as they will; to get into trade dispute resolution and arbitration, as they have, albeit gradually. They have to move to a greater transparency, to greater accountability, to greater international standards of doing business, if I can put it that way. That is beginning to change, in at least that sector of their life, if you will, some elements of what we would call the rule of law.

That rapid economic growth and life style growth, if I can put it that way, and the slower change in terms of political structure, call it the rule of law or whatever you will, is in my mind a chasm that at some point has to be bridged, or it could be socially destabilizing.

Senator Andreychuk: I guess the preoccupation we have is with whether there will be sufficient political stability to avoid that. In your opinion, will there be an upheaval that could retard the gains that anyone trading or investing with China may make in the short term?

Mr. Saywell: My best guess would still be just a guess. I have been in the China watching business for a very long time and I have learned one thing, and that is that all we are doing is guessing. Every time I have made a prediction, I have no more than left the room than I have seen the newspaper headlines saying how wrong I was.

Senator Andreychuk: Maybe I could put it differently. If you were to put your money somewhere, is that the area you would put it in, or would you look to some other emerging markets as a better bet? In other words, should the Canadian government be supporting other markets, or should it give an all-out push at this point to China? Should we be warning people of the pitfalls of going into China or not?

Mr. Saywell: I put my money in Southeast Asia when I invested internationally and I did it at exactly the wrong time, about three weeks before the crash. Do not hire me as your financial advisor.

One important point I would make is that Asians now have enormous self-confidence. When I was president of SFU, I used to go out and visit our alumni. We had many alumni in Malaysia; the first time I visited them was in the mid-1980s, and all they could ask me was how I could help them get back to Canada. They missed it; they wanted to emigrate, and so on and so forth. By about the late 1980s, early 1990s, they were telling me how well things were going for them, for their families, and for their business and so on. The last call I made was in 1993, just before I stepped down, and they kind of put an arm around me and said, "Bill, you know, things are tough in Canada; why not invest in Malaysia?", which I did, as I say, three weeks before the crash.

I will give you my best guess as to what will happen in Southeast Asia. First of all, the growth in the area will be largely driven by what happens in China, and political stability will be largely driven by what happens in China. So we must be involved; we simply have no choice. It is in our own self-interest to be as deeply involved in every possible way of engagement, including investment and trade. The Chinese have a marvellous track record in repaying loans, for example; they are the best in many ways, as World Bank officials will tell you. So we must be there. The whole question is whether they can manage this carefully and intelligently. Over the last couple of years the indications are pretty positive. I would say we must be there and I would bet my money on continued political stability and economic growth; but I would not put my whole mortgage into it.

Senator Stollery: About two or three years ago I read some reports from the finance ministers at a financial meeting in Davos. Apparently the Chinese -- it may have been the finance minister or the trade minister, one or the other -- were being dunned by people whose contracts were not being paid. In other words, there was a big problem, and I think it is a continuing one, of firms having completed projects in China and not being paid. It got some press in the Financial Times not more than two or three years ago. Do you have any comments on that?

Mr. Saywell: There are throughout Asia, including China, western companies, international companies, who have been taken to the cleaners, who have chosen bad partners. You must develop your business carefully and slowly; you must have the right partner; you must know what you are doing. Often it is as much the fault of not having done your homework as anything else.

What I was saying about their track record with the World Bank, for instance, is that the World Bank will give them an absolute "A plus" report card that is government backed.

Senator Grafstein: When you go to China, obviously it is a different question than as relates to Japan, because of all the issues that you raised -- rule of law, stability of decision making, who the decision makers are and all of that. So I do not disagree with your strategic position: We must be there; the question is how, where and to what extent. It is a more difficult issue, in my view, for us in this committee to thread the needles in China.

Having said that, let me just ask you for a rerun of one strategic comment that you made, and then we can touch some tactical issues. Strategically, you seem to feel that the transition, and I call this a country-risk issue, that the post-Deng transition is pretty well in place and therefore you foresee stability. Again, my personal analysis is that that is not really consistent with the cycles of Chinese history; I believe that when Deng expires finally, and I hope it is sooner as opposed to later, there will be as a consequent tremendous change in the central committee and the central power structure of China. Assuming that is correct, do you foresee any change in the opening up of trade and all the rest of it to the West? In other words, assuming my conclusion is correct that there will a massive change in the decision-making structure and in the personalities -- and I believe there will be, and I can almost name those who will be the likely successors in power and they will be different from the current set of players -- do you foresee any change in your analysis in terms of the overall business thrust, the trade thrust in China?

Mr. Saywell: That is a very difficult question to answer. I am not trying to waffle; it is just an impossible question to answer. You are right that the succession moments in the past 20 years have been difficult ones.

Senator Grafstein: In the past 200 years.

Mr. Saywell: Well, sure, the last 2,000 if you want. But what I said was that the current players have in fact positioned themselves so that when Deng finally goes -- and to all intents and purposes I think he is gone -- they will be fairly well established in their positions of authority. Whether they will survive more than two or three years as the key actors, which is the point you are making, is, I think, anybody's guess.

Depending on the issues of regional rivalry, regional power, and where inflation is in that two- or three-year period -- depending on all of these things, there can be either a smooth transition to the next group of people or it can be bumpy. At the end of the day, the economic reforms and the dependence of China on international trade and investment are so deeply embedded that I do not see China taking a different strategic direction.

I do worry, as I said earlier, about the Sino-U.S. relationship, because there are difficulties and rhetoric involved in that which can be very unnerving. Essentially, I am optimistic that the course they have taken economically is one which virtually all sides are committed to. One of the early indications of how smooth the transition ultimately will be will be the extent to which the transition in Hong Kong is smooth. If you look at that, you have to say the economic transition of Hong Kong to Chinese sovereignty took place several years ago. The border is transparent in many ways. Ninety-five per cent of Hong Kong's manufacturing has long ago gone over the border and so on. China wants to make Hong Kong work. The question in my mind is: Do they really understand it and can they?

There is the issue of censorship of the press; a form of early self-censorship is already taking place. Well, you do not have a totally free press in many Southeast Asian countries. In Singapore, for example, it is self-censorship. There are the issues of trying to control economic information, of Internet access and of financial information in open journals of the world. They do not understand that this is just the bedrock of international global economic interchange. The risks of their really messing things up in Hong Kong are reasonably high in my judgment, and that is something that will be an indication of just how fully understanding they are of what has to be done in terms of their overall situation.

Senator Grafstein: I have just one tactical question, because I may not have followed this as carefully as I should. The focus of business decision-making in China is quite complex. My first thought when I first went to China was that you had to deal with Beijing. I have since discovered that the "central" government is really very strong regional governments and city governments, and parallel to the regional and city governments are very strong state institutions, which are either regional, central, or in between -- for example, the army. You might assume that the army is a central business centre; but it is a highly regionalized and diversified. I mean to say, regiments now, or battalions or even generals, have their own business empires.

Can you give us any insight into that? In other words, for Canada to invest in a process that is not transparent from a decision-making process is very difficult, and can you give us any insight into how you would say that for us? What are the business focuses and where should Canadian government and Canadian investors go? What are the soundest routes into the monolith?

Mr. Saywell: Well, you are very well informed on this subject and you have asked about 12 questions there which I cannot begin to answer entirely. You are right first of all that there is not one China market; there are many markets. There are eight clearly identifiable large regional markets. One of the studies coming out of our Asia-Pacific Foundation is concerned with the sub-regional markets in Asia; sometimes they are international and not just of one country; sometimes they are regions consisting of more than one country.

I mentioned the growth of regionalism as being a source of tension and difficulty potentially, which is quite clearly the case. The Chinese national government undertook a major tax reform change last year because they were losing their share of national growth tax and revenue and they simply had to have a bigger share for infrastructure development and so on. There is a whole host of problems related to regionalism that are very trying. At the end of the day my best guess would be this: Regionalism will not end up as a very disruptive civil-disobedience-violence kind of thing, but China will move toward some kind of loose federal structure, that will simply have to accommodate the enormous autonomy that regions like the Guangdong-Hong Kong area will have. Guangdong-Hong Kong-South China, as one entity, will be an enormously powerful economic and political force. They are going to have to recognize that in some form of gradual negotiation, if you will; I call it "federalist" for want of a better term, and I think in some ways that is beginning to happen.

In terms of what Canadians focus on, we obviously begin by focusing on what is our competitive advantage. In some of those areas it is clearly important to have a national government with China's imprint. In some cases that is who you negotiate with anyway. In other cases you can do it regionally, locally, and the key is to have a partner who knows the area, knows the region and can serve as your intermediary as well.

Senator Oliver: I want to ask you a question about Canadian foreign policy; at the beginning you said that certainly since the Pearson years you favour the position Canada has held. I would like to test that a little bit by talking about Taiwan. Taiwan is a country of enormous reserves and they are making very substantial investments in Southeast Asia, very much along the lines of Japan. Do you think that Canada's one-China policy will continue to serve us well in the future or should we be doing something to try to recognize Taiwan because of its enormous financial strength and potential strength for trade ties?

Mr. Saywell: Frankly, I do not think we have a choice. I do not think the international community has a choice. The Chinese are absolutely adamant on the one-China policy. The Taiwan Strait missile crisis last spring was a clear indication, not only to the Taiwanese but to the rest of the world, that China would not tolerate an independent Taiwan. President Lee's visit to Cornell and the honorary degree was something that sparked a whole set of concerns that are very fundamental to the Chinese. I do not really think we have a choice if we wish to remain, as we must, as a trading investor with China.

I was one of the Canadians who in the early years said that we were being too careful about the one-China policy, that we could develop unofficial, semi-official relationships with Taiwan, and I think obviously we have done that and our policy has moved very well. We have an embassy in all but name in Taipei, a very well staffed one; our trade relations are good; our investment coming into Canada from Taiwan now, which is the second wave of Chinese investment after the big wave of Hong Kong, is the most important thing happening domestically.

At one time students from Taiwan all went to the United States; we have now increased our share of that by about 30 per cent in the last year. So our relationship with Taiwan is good. Ultimately, however, we do not have a choice. Even the Taiwanese are investing in China, not just across the strait, but throughout the entire country. They are moving toward direct sea links, toward direct air links, and the economics of their relationship will drive that relationship; but at the end of the day we do not have a choice.

Senator Corbin: I have been perusing some of the papers that you have made available to us. By the way, I see that they are also available in French, so I will proceed en français.


Perhaps the Clerk of the committee could obtain these documents for us in French because there is a footnote in each document stating that they are available in French.


I guess it is a footnote observation more than anything else, but the Issues for APEC Series No. 3, "Stability, Security and Business in Asia-Pacific," relates to Canada's minor role in dispute resolution efforts, its role in Cambodia as a peacekeeper and its follow-up in mine clearing and that sort of thing, but there is an interesting observation; I do not know if it is a reproach that is being made to Canada or an invitation to profit from opportunities in the way Australia has done in Cambodia following its peacekeeping mission. Indeed, if I may, I will quote from the paper:

Some Asia-Pacific countries -- for example, Japan -- continue to regard Canada as an afterthought in their security planning, a footnote to the invitation; others, such as South Korea, welcome Canadian involvement and see it as an advantage to have other non-major powers involved in the region.

I respect that this is the author's opinion, not necessarily yours; nevertheless, the suggestion is there that, if we had a more engaged presence at the military-conflict-resolving level, that indeed could elicit more good will from the potential Asian partners in business. Do you have a response to that? Because the comment was made, and was made for a purpose; it is not just an observation, in my opinion.

Mr. Saywell: My view of our foreign policy and relationships of this kind is that we are playing it about right. We are realistic; we are not a great power; we are not looked at as being at the table of major decision-making on strategic issues; we do things rather more quietly and subtly, but not without effect.

For example, good work has been done by some scholars, and people involved in business in South China have seen a dispute resolution being made quietly behind the scenes which has not made any press at all. We have worked with Indonesia on that, and brought in the Vietnamese and so on. That is the kind of work that Canada is looked upon as being able to do, because we are not a great power.

We are, however, and should and must remain to be, at the table wherever there is a multilateral organization that engages in this -- and not just APEC, to which I think Canada is rightly giving a lot of time and energy and commitment. APEC is largely economic, but by definition now strategic issues and stability issues are economic; they are not necessarily only military. The biggest security issues now are things like illegal migrant labour, the international movement of drugs, and trans-border environmental degradation; all of these things are involved; so, when you talk about APEC being strictly an economic body, by definition it cannot be just that any more. For Canada to be very much involved in these multilateral organizations in Asia-Pacific is important. Similarly, we must be present for ARF, the Asian Regional Forum, which is track one, the official track of security discussions in Asia; we must be there.

Senator Corbin: Are we getting any dividends from that exercise?

Mr. Saywell: I think the major dividend is the strategic dividend; the building of confidence, and peace and stability internationally is in all of our interests as opposed to an immediate payoff in terms of increased trade.

Senator Andreychuk: Although we talk about the good relations in trade between Canada and Japan, the criticism certainly in Western Canada is that our natural resources flow one way, to Japan, and the value-added is there, and we might be better off maintaining those resources at home and turning them into value-added here and then use that in the markets we have, including Japan. Do you have anything to offer on that?

Mr. Thornell: That is occurring. There was a time when you could truly call what Canada sent to Japan rocks and logs. That is no longer the case. We have moved from logs to dimension lumber, to windows and doors, to prefabricated housing. The fact is that Japan imports a lot of resources because they do not have any, and those Canadian exports create a lot of jobs in Canada; but what is also occurring is that Japan is importing more and more all the time and Japan is a tremendous importer of manufactured goods. It is just that Canada has perhaps not successfully developed all of the products for that market.

The nature or the structure of Canada-Japan trade, with this fairly heavy dependence upon natural resources, is not mirrored in Japan's relations with other countries, or with very few countries, so the opportunity is there for us to move up the value-added chain. The problem is not on the Japanese side, the problem is on the Canadian side. If we make those products and they are competitive, they will buy them, and they have shown that in a whole host of sectors.

The Chairman: I wanted to ask a question about Japanese politics. I do not understand what the contest is. Is Japanese politics primarily a tussle between naturally ambitious persons or are there substantive differences that have an influence?

Mr. Pringsheim: Motivation is the one thing you can learn only by putting somebody on the couch and getting him to confess. I do not know whether you could get a politician, even with the use of thumb screws, to tell you what his motivation is. I think there is a very large number of naturally ambitious and mutually contentious people in Japan who want to make it in the area of politics. As far as ideological differences are concerned, there is one party that seems to believe in an ideology, the Communist Party of Japan; and they will not participate in the government, nor will the Japanese ever make them the government.

There are five other parties. What the differences between those parties are is a good question, because many of their members have been members of two or three of the parties already; so you do not know where they are going to wind up next. Most of the Japanese politicians that hold seats in the Japanese Parliament today are conservatives. There are a few socialists left, but the last time round the socialists gave up socialism and gave up all the principles they had defended for 40 years in order to become members of the government.

I do not think it is a ideological matter; it is a matter, yes, the socialists do have some principles which they adhere to. For instance, Mr. Murayama insisted on making a more sincere and more genuine apology for Japan's conduct during the war. The rest of the Parliament did not want to go along with him but he stuck to his guns and he got almost what he wanted in that respect.

You may have noticed that for the last two weeks, ever since the election took place, the Liberal Democratic Party has been negotiating with two other parties that used to be members of their coalition; the coalition members, the Sakigake Party and the Social Democratic Party of Japan, have refused to join the government and have said that they would like to co-operate with the government, but outside the government; they do not want to become ministers. Furthermore, before they will even commit themselves to doing that, they are making certain demands. For instance, they demanded that the Japanese Party commit itself not to accepting money from business.

Good heavens! If you will not accept money from business, where are you going to get the money? Certainly, the public is not going to donate billions of Japanese yen to the political parties. I do not see how Mr. Hashimoto, who would like to be Prime Minister again, and will be, can commit himself not to accept political donations from business.

They have also insisted that the American forces in Okinawa should be reduced and eventually thrown out. Well where are you going to station them? In Vancouver? That is too far; that is too close to the American continent. The Americans want to be out there and so they want to stay in Okinawa.

These are two of the central demands made by the leaders of the Socialist Party and the Sakigake Party; they want a rejection of political contributions from business and they want to throw out the Americans. Mr. Hashimoto cannot agree to those conditions. On the other hand I think they will reach an agreement which will sort of fudge the issue a little bit -- "We will talk more about this and we will negotiate more about this" -- and Mr. Hashimoto will eventually get his coalition. But at least Takako Doi, a very interesting lady I might say and the first lady political leader of a Japanese political party, is making good points, and I think they are a good influence on the basically conservative government. They are not socialists through and through mind you; they have not been for years, and the only ones who continue to have these ideological hang-ups are the communists, and they have 26 seats in the Parliament now but they will never control the government. They will refuse ever to join with or vote for the Prime Minister from the conservative side.

It is my opinion that Mr. Hashimoto probably on November 7 will be re-elected by a good margin with the cooperation of the Social Democratic Party and the Sakigake Party. I believe there will be a compromise in which the socialists of the Sakigake Party will not accept cabinet positions. That will show that they have character, because cabinet means money. They will, however, vote for Mr. Hashimoto in the vote for Prime Minister, and will continue to be able to threaten him with bringing down his government, because he will not have a majority, but only the wherewithal of a minority government. They will continue to have influence and I think they will have made their point.

The Chairman: Let us stay with Japan for a moment. I look at lists of banks and I see lots of Japanese banks at the top of the list of the world's biggest banks; yet I also read that they have had a lot of trouble in their banking system. What happened?

Mr. Pringsheim: Basically during the so-called bubble economy period the banks counted real estate as collateral and stocks as collateral. When the bottom fell out of real estate and out of stocks the banks were suddenly all bankrupt because they did not have the money that they thought they had. Japanese banks are no longer so predominantly at the top of the list. That was true five or ten years ago. Today there are fewer Japanese banks, although there are still a great many Japanese banks on the list because they have such very large accumulations of capital. However, they are hopelessly indebted; they are indebted tens of billions of dollars and it will take a long time for the Japanese banking system to redeem itself. They are being at least partly bailed out by the government by tax revenues.

Mr. Thornell: The banks in Japan have been getting the coverage about all the trouble they are in, especially a particular category of banks, the sort of housing-loan cooperatives. Perhaps because of some regulatory oversight they were permitted to lend very large amounts of money on the basis of the strength of the real estate market, in particular, and also to a certain extent the stock market. As Mr. Pringsheim pointed out, when those markets collapsed, those banks were left with huge inventories of bad loans, which they have not been able to cover, and as a result the government has had to intervene to resolve this crisis.

It should be noted that that is only one category of banks in Japan; most of the banks in Japan, while they are not topping those lists, remain nevertheless extremely healthy and are still among the largest banks.

Mr. Pringsheim: They have been writing off billions of dollars every year so the situation is definitely improving, but the Japanese banking system is not in a desirable condition at the present time. There is tremendous indebtedness and it will take several years until that can be brought into line again.

The Chairman: We were told earlier, I think by Mr. Saywell, that in looking at the whole area we must pay attention to what I will call the overseas Chinese; is that a good label? Mr. Saywell talked about the importance of networks. I assume that these are like big family networks, or clan networks almost. Assuming that that is correct, is there conflict or friction between these overseas Chinese on the one hand and the tentacles of Japanese industry reaching down into Southeast Asia?

Mr. Saywell: No, not as such. For Asians, particularly the ethnic Chinese-based societies of Asia, networks and connections -- the Chinese word is "gwanshee", for which there is no really true accurate translation -- are terribly important; the people you went to school with are lifelong associates, and you can always call on that relationship to assist you in any way.

One of the things that the West must do in terms of doing business effectively with Asians, especially ethnic Chinese Asians, is to recognize that you have to build up that relationship for the long run and then it is a powerful source of support for you. The sort of quick and dirty deal in Asia is just not on; it will not work or last. The networks are families, friends, people who go to school together, people who have had a close and intimate relationship with each other in a business, government association or whatever it may be.

The point I was making was that in Canada we are, in my opinion, blessed by having a large population of Asian Canadians, from the fourth and fifth generations to those who have just arrived from all parts of Asia. Korean immigrants and Korean investors, for instance, in the last few years have been a very strong group, and we should be taking advantage of that to learn from them.

The Asia-Pacific Foundation a couple of years ago did a study called "Canada's Hidden Advantage." We held a series of round-table discussions across the country, in which we had non-Asian Canadian business people around the table for half a day with more recent immigrants who were Asian business leaders, and they never talked with each other. We issued a report with a series of recommendations for local chambers of commerce, and so on and so forth, suggesting that they try to pay a little more attention to this, because we are missing the boat in terms of learning from Asian immigrants and trying to build on their natural relationships in the rest of Asian.

Is there a natural conflict between Japanese investment and these groups in Asia? I do not think so; not as such. There are obviously competitive rivalries, but I would not think there was a basic confrontation.

The Chairman: There was just a passing reference to the situation in Indonesia. I was told by someone knowledgeable about Asia-Pacific that Indonesia is a country that the committee ought not to ignore. What we are concerned about is primarily trade, and of course the committee, I suspect, is interested in security insofar as it impacts upon trade. From what I have heard so far today, I would say China is very important and Japan is very important; what about Indonesia?

Mr. Saywell: I think the whole region is very important. If you have to establish priorities in terms of countries, I think those are the priorities and I would put Indonesia as the third priority. I do not know whether you are covering South Asia, the subcontinent or not; if so, clearly you have a whole set of other problems and issues to deal with in which India is the emerging market force, and in which Pakistan is in a very difficult situation that could blow up at any point. So you have a whole set of other problems.

Senator Grafstein spoke about what we should focus on and what our strategic platform should be, and I have been reflecting on that, but it is too late for me to get into that issue now, and you might not welcome my views anyway. But perhaps at some other time, say when my organization assists you in Vancouver, we might try to get even two or three of us together to chat a bit about that, even informally, because I think that will be a key issue.

It would seem to me that the focus should be on the economic relationship and ways in which other things impact on that. Our ODA priorities are clearly one; the degree to which we are involved in security discussions may be another; and so on and so forth. It is a central question which I will reflect on quite a lot after this meeting, and perhaps we can get back to it.

The Chairman: We have just finished a study on Europe, and I think our report has cohesion; it holds together, not because of our insight, but because of the fact that Europe has institutions that pull a large part of Europe together. On the other hand, I have told members of the committee that I feel like a pilot coming in to land. I have instructions to land and I see about seven or eight airfields all lit up; I do not know where to go. What you have told me has been helpful to me, but I will be doing a fair amount of field hopping -- China, Japan, Indonesia -- and each field tends to be quite different from the other.

Mr. Saywell: It is, but there are some common themes, and the regional integration in the area is both economic and, to a certain extent, multilateral. I would say that the focus must be the economic relationship with the region as a whole, and to the extent that that economic relationship is bedeviled by security issues and other issues you must look at those.

China, Japan, Indonesia comprise the key area, but I would certainly focus some of my thoughts on APEC. APEC has emerged much more rapidly and much more forcefully and effectively than any of us, who were involved in some of the precursor organizations that led to APEC, could ever have thought possible. I think it is a kind of organization in which this country can play an important role.

I would also look at ODA, because while we will not change the landscape of Asia we can build connections. If I were setting ODA policy for this country I would put a great deal more emphasis on human resource development; not only is it a critical issue for Asia's developing countries, but there is a strategic payback for us by building our relationships and friendships.

The other landing field is, of course, to recognize that the creature of Parliament, the Asia-Pacific Foundation, still has a very important mandate to play in raising the consciousness of Canadians about the importance of Asia, and that should be right under the subtitle of your report.

The Chairman: Members of the committee, Bill C-54, an act to amend the Foreign Extraterritoriality Measures Act, has had second reading in the Senate and has been referred to this committee. I anticipate that we will be meeting next Tuesday to consider that measure and I put you on notice of that.

Before we conclude, I must say that I found this a fascinating session; we are most thankful to our witnesses. We will be turning to them again and again, I suspect, particularly when we go to Vancouver.

The committee adjourned.