Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 19 - Evidence - Afternoon sitting
VANCOUVER, Wednesday, February 5, 1997
Upon resuming.
The Standing Senate Committee on Foreign Affairs met this day at 2:00 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.
[English]
The Chairman: This afternoon we begin with a panel on Japanese-Canadian relations. We have three distinguished panellists. I will introduce them in the order in which I understand they will be making initial statements. We begin with Arthur S. Hara, Chairman of Mitsubishi Canada Limited and also Chairman Emeritus of the Asia Pacific Foundation of Canada. We have Mr. Yozo Yamagata, who is Chairman of Yamagata Consulting Limited. Thirdly, we have Tamako Yagai Copithorne. I understand that Mrs. Copithorne is a long-time, experienced resident of Japan and is said to be very helpful to the committee.
Mr. Hara, would you lead off, please.
Mr. Arthur Hara, Chairman of Mitsubishi Canada Ltd.: Mr. Chairman, welcome to sunny Vancouver, Canada's gateway to Asia Pacific and the site of the 1997 APEC economic leaders conference this November. I will start off by giving a brief overview of strategy. My colleague on my right, Mr. Yamagata, will follow up with a more detailed explanation. My colleague on my left, Mrs. Copithorne, will wind up by touching upon the cultural and educational aspects, and will stress that, without mutual understanding, no one of the above will work.
The world is changing rapidly, moving toward a borderless economy and a global marketplace in which knowledge is becoming vital. The question for Canada which, due to a small population base must export one-third of her GDP and is dependent on international trade, is what strategies should be pursued to ensure our international competitiveness. It is within this framework that I would like to emphasize that the Canada-Japan ties should no longer be considered in a narrow, bilateral context. Rather, the challenge is how both countries can cooperate to tackle the global marketplace, especially the Asia Pacific region.
Asia Pacific is becoming the world's most dynamic economic region and Canada must not miss out on the opportunities there. Tactically, we must increase our exports, but in a sense that is supplying fish rather than teaching how to fish. In that respect, I would point out that most of the Japanese direct investments in Canada are not in real estate, but in wealth and job-creating industrial and manufacturing operations. They are export oriented rather than being focused on the domestic market, with an ever-increasing amount being exported to countries other than Japan.
The composition of these exports is also changing, from an initial concentration on natural resources toward emphasis on value-added products, engineering and technology and even the export of plants. By "plants" I mean factories, not flora. If I may mention a personal note, our company, with its 16 joint ventures in Canada, exports 1.5 per cent of Canada's total global exports. This is one reason why efforts should be intensified to attract even more Japanese direct investment to Canada. Strategically, Canada should assist in the creation of wealth, for as these countries become more affluent the demand for goods and services will increase correspondingly and that will stimulate a long-term, vibrant export market. We should capitalize on the good will that Canada commands. In order to assist in the creation of this wealth Canada should invest in the foundation of any country's economic growth, the infrastructure, plants and technology and education. In other words, teach them how to fish. If that is done, it is only natural that when future major projects or business opportunities arise the first place that will spring to their minds is Canada.
One way to accomplish this may be to take advantage of Japan's ODA program. At $12 billion U.S., Japan is the largest ODA donor in the world, with 80 per cent being earmarked for the Asia Pacific region -- and most of this is untied. There is opportunity here for Canadian engineering and energy firms, which have sterling reputations, to link up with Japanese partners to utilize this ODA program and to get involved in major projects in the Asia Pacific region. Canada brings a tremendous amount of good will to the table.
The world is moving towards a borderless, global economy and knowledge will play an increasingly vital role in a country's international competitiveness. In order to enhance Canada's knowledge sector I wonder whether it would be in Canada's interest to establish an "immigrant brainpower fund", where the qualified, non-wealthy immigrant would not be bringing money but would be bringing brainpower and knowledge, essential ingredients for Canada's long-term competitiveness.
Although Japan is often overlooked in the flavour of the month, she is a crucial factor in formulating Canada's Asia Pacific strategy. One study indicates that, if a certain Asian country's GDP has 10 per cent growth, two to three per cent of that is due to Japanese investment. The Japanese economy and presence in this region makes up 75 per cent of the total regional economy and her economy is also eight times that of China. For Japanese ODA, the 10 major recipients, by amount, are China, with 13 per cent; Indonesia, Thailand, India, the Philippines, Mexico, Sri Lanka, Bangladesh, Egypt and Pakistan.
Japan is also Canada's second largest trading partner, with Canadian exports to Japan being equal to Canada's combined exports to her five largest European markets. That is why a Canada-Japan partnership will be beneficial to Canada's global strategy and long-term economic well-being. An Asia Pacific strategy without Japan is akin to a North American strategy without the United States.
Mr. Yozo Yamagata, Member, Canadian Advisory Board, Marsh & McLennan Ltd.: Mr. Chairman, honourable senators, today I will focus on the Asian region, including Japan -- a region that has been making substantial economic growth, thereby attracting attention from the rest of the world. I will be dividing my presentation into two parts before coming to my final summation. First, we will look at the features of the recent economic development in Asia; second, we will consider Canada's trade and investment relations with Japan. Finally, we will explore some solutions for more business for Canada.
There are several economic indications that show why Asia is now attracting world attention. There are outstandingly high economic growth rates compared with those in Europe, the United States and Japan, ranging from an average of 6 per cent to 10 per cent, which is very high compared to the other advanced countries. There is also the enormous size of the Asian foreign currency reserves.
At the end of 1996 the total currency reserves of the Asian countries was $666 billion U.S., which accounts for 43 per cent of the total world reserves of $1,560 billion. Japan has the largest share, $209 billion and China, $89 billion. Our population is more than 50 per cent of the world total.
Some research work reported that within 10 years the share of Asian GDP in the world economy will reach 27 per cent, nearly 30 per cent, making it the largest economic block in the world, surpassing both North America and Europe.
What are the features of the Asian economic growth? When we speak about Asia we have to be reminded of its heterogeneity. Asia is quite unlike Europe. Each Asian country differs in almost all respects, in language, religion, geography, climate, social and economic structure, culture and history. We have to distinguish our strategies for each country when we think of marketing and investment.
Although Asia is heterogeneous in its characteristics, a remarkable feature is observable in the Asian economies, and that is a rise in international trade and international investment. International trade in Asia today, including Japan, is 46 per cent, nearly 50 per cent, which is quite high. For comparison, Asian trade with the United States is 23 per cent. Ten years ago that figure was 32 per cent and international trade in Asia was only 33 per cent. The same trend can be seen in direct foreign investment. Nearly 80 per cent of all foreign direct investment into China is from countries within that region.
The next feature is Japan's special role in Asia's economic development. Let us look at Japan's foreign direct investment, which totalled $50.7 billion in 1995. Its breakdown was as per Table 1. The United States is still number one with 44 per cent, but Asia is second with 24 per cent. Asia's ratio has been increasing remarkably in the last few years, as per Table 2.
It is interesting to note that the period of Japanese investment interest in Asia has coincided with the period when Japanese manufacturers rushed to shift their operations overseas, especially to Asian countries. The overseas location of manufacturing facilities was triggered by a strong yen wave, going back to the late 1980s. It was done in order to take advantage of lower labour costs and some other economic factors necessary to survive in international competition.
The manufacturing industries ranged quite broadly from textiles to electric machinery and electronics. As a result, nowadays there are quite a few Japanese products in which the ratio of overseas manufacturing is very high; for example, for such products as colour televisions, electric washing machines and electric fans, the ratio is as high as 70 to 80 per cent.
Table 3 shows the manufacturing and non-manufacturing sectors, and in the manufacturing sector Asia's ratio surpasses North America's now, 43 per cent versus 40 per cent. For many years it was the other way around.
Although this trend to overseas locations of Japanese manufacturing was viewed as a cause of concern in Japan, the so-called hollowing out of industries, -- in Japanese, sangyo kuudooka -- it enabled Japanese manufacturers to boost their own competitiveness and maintain market shares in Asia and in other countries, such as the United States. At the same time, it helped the economic development of Asian countries, which have taken an open-market trade policy and have encouraged foreign investment. This increase in foreign direct investment in Asia has also induced changes in trade flows in the region, which is shown in Table 4.
Japan's export to Asia has increased tremendously from 1990; it has gone up each year to 1996 especially in the form of capital goods. Accordingly, Southeast Asia has surpassed the United States as Japan's major export market since 1991. In 1995 Southeast Asia accounted for almost 40 per cent, compared to the United States with 27 per cent. For many years the United States was the number one market, but now that has changed.
Japan's surplus trade balance has been increasing greatly in Asia, surpassing that of the United States since 1992, where Japan's surplus trade balance has tended to decrease, and that has helped to soften the pressure from the United States. Trade friction, in a sense, is softened.
While capital goods exports to Asian countries have increased more than the imports of finished products to Japan, accordingly the trade balance with Asia has increased in favour of Japan.
In conclusion, we can say that, by shifting operations overseas, in other words, this hollowing-out-of-industries phenomenon, Japanese manufacturers have incidentally matched their industry's need for and interest in rapid economic development and increased regional trade in this region.
We have so far looked at how outstanding the economic development in Asia has been in the past. It is said that Asia will continue to grow in the future at a much higher speed than any of the other trading areas and that the 21st century is the century of Asia. Although no one doubts that Asia will remain a fast-growing economic region in the next few decades it is too optimistic to expect that Asian economies will grow in a straightforward manner at the same outstandingly high rate of the past years. Already there are several unfavourable indications in almost all countries in Asia. Exports have started to decrease, the trade balance has deteriorated and the growth forecast has been shaved by as much as two percentage points.
On the other side of the coin, therefore, we should be reminded of the foreign structure problems inherent in the Asian countries, such as infrastructure, inadequate training of workers, low level of technology, capital markets, rising costs, especially wage costs which are constantly rising, overcapacity of some of the manufacturing facilities, regional gaps in the economic development income level, and corruption.
I have now come to the second part of Canada's trade and investment relations with Japan. The reason I have picked Japan is its vital role in Asian economic development, and Japan is already Canada's second largest trading partner.
Canada's trade volume with Asian countries is still comparatively small. It is 5 per cent of exports and 8 per cent for imports for all Asian countries combined, except Japan. Among the Asian countries Japan accounts for about 5 per cent of both exports and imports in Canada's total trade volume. This ranks second only to the United States for a single country. Although Japan's share is comparatively small compared with that of the United States, Japan is an important trading partner to Canada, since it is not only the second largest trading partner, but also because it is a significant purchaser of Canada's strategic natural resources like coal, lumber, pulp, grain, fish and food materials. Japan's trade ratio is considerably higher in some of the provinces, like British Columbia, where the trade share is as high as 25 to 30 per cent.
What about Japan's foreign direct investment in Canada compared with the United States? In 1995 nearly 45 per cent of Japanese foreign direct investment went to the United States, but only 1.1 per cent went to Canada, as per Table 2. If we compare both countries' general economic size -- about ten to one for the States, Canada should have a share of 4 per cent to 5 per cent of the total Japanese foreign investment. So this 1.1 per cent share is a considerably lower figure than it ought to be. Canada's share has been constantly decreasing, going from 1.6 per cent in 1993, to 1.2 per cent in 1994 and 1.1 per cent in 1995, while the share of the United States has been constantly increasing over the same period, from 40.8 per cent, to 42.1 per cent and 44.1 per cent.
Why is Japanese investment in Canada decreasing, although it is the same North America? How do Japanese look at Canada as an investment destination? In my opinion, there are several possible reasons for the investment disparity. First, there is the market. Canada has a population of almost 30 million, which is not necessarily a small market. However, the population is spread over the world's largest land, which means economic inefficiency for investment consolidation.
The second reason is cost factors. Canada has abundant natural resources of industrial raw materials that are quite economical, and the infrastructure is well facilitated, but labour costs are not low by international standards, although quality is very high.
The third reason is environmental problems. Canada's image is of a vacation land with beautiful, natural surroundings, at the heart of which are the Rocky Mountains and Niagara Falls. Thought to be a place for tourism mainly interested in environmental protection, Canada is not considered a good location for industrial and commercial development.
The fourth reason is inconsistent policy and legislation. Canada is considered an advanced, well-disciplined western democratic country and a politically stable country. However, industrial policy and legislation may change quite suddenly when governments change at the provincial level, especially environmental and labour legislation. Investors are naturally quite sensitive to labour and environmental legislation. In recent years, for example, there were the cancellations of Windy Craggy copper mines, the Kemess project and Alcan's Kemano power project.
Taking into account the facts I have mentioned so far, my last subject is how to increase the Canadian presence in this potential market and to gain more business. There might be a few different alternatives and my suggestions regarding business targets in Asia would rely on taking advantage of Canada's strengths, including infrastructure business. One of the major problems in the Asian economies is the underdeveloped level of the infrastructure in contrast with the rapid economic modernization led by recent industrialization.
According to the forecasts of the World Bank, the Asian region requires infrastructure investment totalling $1.5 trillion during the period between 1995 and 2004. The infrastructure environment involves projects such as the construction of highways, railroads, power stations, water dams and port facilities, in which Canada has considerable experience, expertise and technology. Collaboration with financial organizations is indispensable in this regard. There is a vast potential here for Canadian businesses.
Second, look at industries for which Canada has competitively superior technology, such as pulp and paper engineering, environmental technology, microelectronic software, biotechnology and the tourism industry.
Third, utilize Canada's human resources. Canada has quite a few human resources of different ethnic origin, particularly Orientals who speak and write their mother languages. The Canadian government should take the initiative to set up systems to recruit those human resources and mobilize them for specialized large-scale Asian projects, in one way or another.
Fourth, strengthen the governmental loan system. As I mentioned earlier, financial arrangements are the key to the infrastructure business. In this regard an EDC loan could play a vital role in promoting business if it were expanded in scale and qualification.
Fifth, collaborate in work with Japanese or other Asian partners. In those projects for which Canada can provide technologies or know-how it should collaborate with Asian partners who are well experienced and knowledgeable in local businesses, such as major Japanese trading houses that have tremendous business experience and operational networks in the area.
Finally, encourage foreign direct investment. It is necessary to correct negative or wrong images that many foreign investors, such as the Japanese, may have about Canada. For example, one of the negative images that quite a few foreign businesses may have is that Canada is a high taxation country compared with the United States. However, according to research work done by Peat Marwick in a comparison of investment environments between the United States and Canada, that is not so. There are also some other cost factors that are more economical in Canada than the United States. This should be more politically advertised. More initiatives should be taken on the government side to encourage or support foreign investment.
Mrs. Tamako Yagai Copithorne, Member, Canada-Japan Forum 2000: Mr. Chairman, honourable senators, thank you for this opportunity to appear before you. First, I will give you a brief summary of the recommendations that were made by the Canada-Japan Forum 2000, and then I will focus on some of the issues involved in a Canada-Japan cultural exchange.
In May of 1995 the Canada-Japan Forum 2000, consisting of members from both countries, made 18 recommendations jointly to both governments for political and economic cooperation, environmental issues and cooperation in the cultural field. They were published in the Canada-Japan Forum 2000 follow-up committee report in time for the Halifax G-7 meeting in 1995. There are six priority areas of recommendations. Because I do not have time to go over all 18, let me just introduce you to those six priority areas.
We recommended, first, that both governments coordinate Japanese and Canadian priorities and positions for the Halifax G-7 summit in June of 1995 and for the APEC forum, as well as for the enhancement of the United Nations' peacekeeping role.
The second recommendation that Forum 2000 made was in the field of economic cooperation. We recommended exploring a bilateral dispute management mechanism to supplement the WTO dispute settlement mechanism; to eliminate trade and investment irritants involving access to each other's markets; to increase awareness on the part of Canadian exporters concerning opportunities in the Japanese market. We also recommended that both governments encourage active involvement in the APEC process by the private sector in both Japan and Canada.
Third, following the progress attained by the joint bilateral project entitled "Stewardship of the North Pacific Ocean", the forum recommended that such projects should be expanded to provide opportunities for Japan and Canada to work as partners in third countries.
Fourth, in the cultural field, in order to increase exchanges and expand long-term cooperation and collaboration between Japanese and Canadian scholars, scientists, educators and artists, the forum recommended that both governments endeavour to mobilize the resources of the public and private sectors in both countries towards the eventual establishment of an endowment fund to be called the Japan-Canada Fund for Mutual Understanding. That was a significant recommendation that the forum committee made, for reasons I will give you later.
Fifth, the forum recommended encouraging the exchange of more people at the grass-roots level through non-governmental channels.
Sixth, and finally, the forum recommended setting up a continuing dialogue mechanism to be called the Canada-Japan Forum comprised of 10 non-governmental individual citizens, five each from Canada and Japan, to be appointed by the Prime Ministers. Japan has chosen its members, led by Mr. Kitamura, former Ambassador to Canada. The Canadian side is to be led by Mr. Ed Lumley. The other members have not yet been chosen. That is the stage we have reached.
We are anxiously awaiting the continuing work of the Canada-Japan committee. This new forum is to meet annually, alternating between Canada and Japan, to develop a stronger bilateral partnership between the two nations with respect to political, security, economic, environmental and cultural issues.
I would strongly recommend that this new forum first consult with, and thus benefit from the experiences of, similar co-national forums that have already been in existence for some time -- for example, the Japan-China 21st Century Friendship Society, which was established in 1984, the Japan-Britain Forum 2000, which was established in 1984, the Japan-Korea Forum, which was established in 1993, the Japan-Germany Dialogue Forum, which was established in 1992 and the Japan-France Eminent People Forum, which was established in 1995.
I would now call your attention to the importance of cultural exchanges between Canada and Japan. As Mr. Hara pointed out, we consider culture to be the fundamental gluing element for both countries to grow in various fields, and yet it is Canada's economic, trade or tourism policies that are more often discussed. It is disappointing that Canada's action plan for Japan covers only trade, investment and the development of technology, and not culture. I feel we are not paying enough attention to our cultural relations with Japan.
Our government has stated that, in doing business with Japan, we create more jobs for Canadians, but for those jobs to increase and expand we must think more seriously about what we must do. We say that Canada must become more competitive in the international market, but are we training and educating our people properly for that role? Canadians must learn more about the people they are trading with -- their languages, their values and cultures -- to understand and appreciate their differences. We must start teaching language and culture at the elementary school level. We should not wait until our students are 15 years old. We must start as early as possible.
We must provide not only specialist training, but opportunities to various working people in various fields. We must provide mid-career training at all levels. We must consider language and culture training as part of the infrastructure, just as education is part of the infrastructure for the functioning of a society. We must consider culture first as the foundation of a relationship, and not simply as a commercial and trading commodity. For a long-term, growing relationship, culture certainly must be placed at its base.
We must remember the important impact culture has had on those people who are now doing business with Japan. Many of them -- not all, but many -- first studied language and culture, and only then became very interested in Japan and moved into business there. In Canada's relationship with the economic regions of Asia Pacific culture is now treated more as a means to an end, and that end is trade and economic growth. In other words, we use culture to strengthen our trading opportunities and to strengthen our economic relationships.
In 1995, the Vancouver Chamber Choir, one of two professional choirs in Canada and one of the brilliant choirs in the world, was invited to take part in a major music contest in Japan. I accompanied the choir and was delighted to see it receive three gold medals. However, in order for the organization to receive funding to go to Japan, the government had to rationalize a system to that cultural organization. Because Japan is a favoured trading country for Canada, that was the only rationale under which we were able to be funded by the federal government.
There are areas where culture and trade are tied together very well. It is not always a question of trade or culture, or which comes first. We do not always have to ask that question. There are areas where culture and trade are tied very beautifully. For example, commercial art and commercial designs for trading commodities are especially important. As we say when we explain Japanese culture, one of the important things for the Japanese is that "form is substance". It is not only what is in the centre of the material, but it is how it is presented and how it is decorated. The commercial design aspect plays a very important role when exporting products to Japan. It is one of the basic cultural elements we have to take into consideration.
For example, we must have value-added housing materials with attractive designs, not just for efficiency and low-cost aspects, but because we have to understand the Japanese aesthetic sense and what they consider to be beautiful. That is an aspect of culture that is a very important area that we should focus on. There are various cultural commodities that we should consider, such as children's picture books. In the culture of international children's books at book fairs, Canada produces beautiful picture books. There is also the area of Canadian fashions with native art motifs and designs. There are a number of areas where artistic expressions of this country and trade can be very well tied together.
We must increase the visibility of Canada in Japan through Canadian cultural activities. Canada must be known more by the grass-roots-level people. For cultural activities this year, Canada's Year of Asia Pacific is concerned with Asia in Canada only. I was a little disappointed in that. I think we should have tried to put Canada more into the heart of Japan by thinking of more imaginative ways of reaching out to the Japanese people, and not only at the adult level, but for the children as well.
Japan is a children-oriented society. By reaching out to the children we can certainly reach their families, and adults generally, whereas by concentrating solely on adults we find that many things stop at the adult level. For example, the Japanese are actively looking for good materials for a learning kit for English, and a number of organizations in Canada are interested in producing a suitable English learning kit for Japanese children.
We should also consider exporting children's culture, which includes music, theatre and sports. A trade show is not the only way to introduce Canada to Japan. There is a variety of imaginative ways to introduce Canadian culture there. Journalists and writers of both countries should be writing and we should be reading. We should certainly be sending more cultural performers and exhibitions.
Canada's multiculturalism is certainly very attractive to the Japanese. On November 29, 1996, during the Prime Minister's visit to Japan, a major Japanese newspaper, Asahi, included an editorial about Canadian multiculturalism. It painted a glowing picture, full of admiration and wondering what the Japanese can learn from Canada. The editorial was entitled, "What must we learn from Canada?" So people there are certainly paying attention. Interestingly enough in these cases, they do not say anything about trade relations; however, Japan is certainly looking at Canada, but very much in human terms and in cultural and educational terms.
We definitely need more collaborative cultural activities between Canada and Japan -- more co-production in film, more efforts to co-produce films, books, translations and text books. We must promote areas where there has already been binational and bicultural collaboration, as, for example, with Japanese art treasures that exist in Canada. For instance, I am particularly familiar with the 17th, 18th and early 19th century maps drawn by Japanese cartographers and artists of Japan and of Asia, because there are about 450 wonderful maps of Japan, drawn by Japanese in that period, right here in Canada. They are considered to form one of the very best collections of that nature in the world, and that exists in Canada.
We should do a homecoming show in Japan -- anything to attract Japanese attention and involvement. There are many areas already existing without creating new areas. Another example in the field of art is musical compositions and composers. For instance, R. Murray Schafer and the late Toru Takemitsu, who received the Glenn Gould award last year, collaborated in a number of musical works. Here we have a wonderful example of how Canada and Japan have been working together, but people will not know these things unless we really make an effort to introduce them to both countries.
The last important point I want to make is that, when we invite Japanese participation in Canada, we really should not concentrate solely on big cities. We have noticed that when we do cultural activities it is much easier to spend X amount of money on one area rather than spread it thinly all over Canada, but in the long run we feel that spreading it out is much more effective and more important. To give you an example, "Today's Japan" was a big cultural event that took place in Toronto in 1995; it was a one-shot, big event, but it did not affect us in Vancouver or in other places in Canada. Canada, as the receiving country, must make the Japanese side realize that Canada has a strong regional autonomy, and that a large event in Toronto will not really affect the rest of the country. Toronto vis-à-vis the rest of Canada is not like Tokyo vis-à-vis the rest of Japan; so when we program culture we are very aware of this regional autonomy and it does not do much good to the rest of the country.
As in other fields, therefore, more coordination among various regions in Canada is necessary for both public and private organizations of both countries, especially for our cultural exchange.
The Chairman: Before turning to my list, I have a question to ask you, Mrs. Copithorne. I was brought up in Nova Scotia and there was a lot of traffic between that part of Canada and the United States. I mention that so you may understand the background of my question.
My impression is that one of the problems in establishing the kind of cultural appreciation you would like to see between Canada and Japan is that a great many Canadians are caught by what I would call the cultural magnetism of the United States. Regardless of whether you rate that as a high or low culture, it is still extraordinarily powerful for young Canadians. I see you nodding. I wonder how we are going to set up other magnetic poles to counterbalance that one great, highly organized pull from south of the border.
Mrs. Copithorne: You mean in relation to Japan?
The Chairman: Yes, Japan specifically.
Mrs. Copithorne: I think the pull is inevitable in Japan. How many times do we hear about America, the United States? The word "America" is the United States. It is a global, international phenomenon. More people certainly go to the United States to study. There are more opportunities in the United States to do research and study.
Canada must increase the opportunities offered to Japanese people. We have to increase occasions to talk about, explain, and introduce Japan to Canadians. We are at the very elementary level at this stage. We have not done enough to draw attention to Japan, and we have not had enough opportunities in Japan.
Senator Carney: I will direct my questions to Mr. Hara and Mr. Yamagata, because many people are interested in the cultural area and will follow that up, and I want to talk about the fact that the market share of the United States is growing and the market share of Canada is falling in Japan.
When I served as Minister for International Trade I made several trips to Japan to try to market the concept that, under the free-trade agreement with the United States, Canada was at least as good as, and probably better than, the United States as a place to position investment, pointing out our labour costs and some of the factors you mentioned, Mr. Yamagata. The market access was the same under the FTA. In many ways our labour costs were lower because our productivity was higher.
I am aware of the fact that Anne of Green Gables, the Rocky Mountains and Niagara Falls are the three major images of Canada in Japan. Whistler is now on that list. I was met with great courtesy, many smiles and very little success, as these figures would indicate. I am still feeling very frustrated about the fact that we are not acknowledged to be a more equal playing field. We really are a more equal playing field than the U.S. in terms of Japanese investment, and I am at a loss to understand why we cannot sell that concept. You have given us the factors that you identified, but the fact is they are just as relevant to the United States as to us.
Mr. Hara, years ago you stated something that I thought was very perceptive. You said one reason for the slow success of Canadians in Japan is that we still have the idea: "This is what we make; you buy it."
Mr. Hara: "This is what we make; this is what you take."
Senator Carney: You said it better than I. The point is that other countries ask Japan, "What do you want us to make and we will make it for you." Is this still true? We have made enormous progress in food processing. We have diversified our market to Japan. I remember our ambassador saying that Japanese cooking uses canola oil. Our software sales have soared. We have diversified. I still do not understand why the U.S. market share is growing and our share is falling, when the obstacles that you list should apply equally to the United States and to Canada. Can you give us a little more insight? This is a big problem for us.
Mr. Hara: Senator, let me answer the latter question first: Why is Canada losing market share in Japan?
In our companies we have 16 joint ventures and we export 1.65 per cent of Canada's total exports throughout world. More often than not a manufacturer will say, "This is what they make; this is what sells in the United States, and this is what we have to take." We try to explain that they have to modify their products for the Japanese market, because the Japanese consumer, especially the housewife, is the most demanding, sophisticated buyer in the world. Even if there is one small defect that is hidden under the wrapper she will not buy it. It is that attention to detail that must be paid attention to. There is a mentality there that we have to overcome to try to teach them that once you get into the Japanese market and establish your brand name, then there is a huge demand for it, but there is that initial step that you have to take. Certainly, one of the reasons is that there is a huge market to the south of us, but if you want to expand to Japan you have to make your product to suit the Japanese tastes.
The second impediment we have found is that, if they wanted to increase their lines of production, more often than not it was difficult for them to get financing. If we thought the product was good, our company would finance it. I do not think that is the right thing to do, because if our company finances it the maker is not a stand-alone operation. They should have their own independence, but we do it sometimes.
Senator Carney: The forest industry did change the specifications and does produce to the Japanese market. What are we not doing that the Americans are? Why is their market share growing and ours falling?
Mr. Hara: On the lumber side, we had a joint venture sawmill on Vancouver Island which was the first one to get the JAS standards approved. With that seal of approval the product did not have to be inspected in Japan, but could be inspected in British Columbia and still have access to Japan. The reason we got that is that we were not dealing with two-by-fours, which is a North American dimension. The dimensions have to be tailored to suit the Japanese market. As well, if there are knots in the lumber it is not acceptable.
Senator Carney: There are bigger knots in American lumber, because American lumber is not as good as ours. That is a fact, as Senator Perrault knows.
Senator Perrault: I am in agreement with you.
Senator Carney: Can you address the issue of what the Americans are doing that we are not? Their market share is growing while ours is falling, and yet the factors you are talking about apply just as much to them as to us. Why are we getting courtesies but fewer orders?
Mr. Hara: My own company exports from both the United States and Canada and we export as much from British Columbia as we do from Washington State.
Senator Perrault: Does the automobile have something to do with it, the pact between Japan and the United States?
Mr. Hara: No.
Senator Perrault: That has no measurable effect?
Mr. Hara: No, there is no link, because in Japan the industries are separate and there is not that much cooperation between the two.
On the second portion of your question about attracting Japanese investment to Canada, the United States has 36 states that have Tokyo offices and they are constantly trying to attract Japanese investment into those states. That is regardless of what the federal government in Washington might say; so there are two levels there. Does Canada make the same effort to attract Japanese investment to Canada? Those 36 states that have offices in Tokyo will take Japanese investors to their states and they will hand-hold them through the regulatory mazes and ensure that the state government opens the door all the way down. More often than not in Canada, and in the provinces, when Japanese investors are invited to Canada or to the provinces, they are left alone to find their own way through the maze. We have had that happen more than once.
Anecdotally, I can recall one Japanese investor who came to Vancouver and threw up his hands and walked away because he was told he had to go through 26 different federal, provincial and municipal offices to get clearance.
Senator Grafstein: In which province?
Mr. Hara: British Columbia. One way might be to have some mechanism where there is a hand-holding process or guidance as to how to get through the maze until the door is open.
Senator Perrault: Or remove the maze.
Senator Carney: Shutting the B.C. Trade Corporation down or limiting it would go against that trend or that current.
Mr. Hara: I do not want to sound negative on this, because Canada is a good place to invest. We have 16 joint ventures in Canada and are doing very well.
Senator Carney: The United States' share is growing and ours is falling.
Mr. Hara: As my colleague mentioned, there are overlapping federal and provincial ministries, where one ministry may say, "Okay, you can do it that way," and then at the next door they will say, "No, you have to do it our way." It is more than one ministry and it is confusing.
Senator De Bané: The work force in the United States is less unionized than Canada's; their taxation rate is lower than Canada's, and their transportation system is more efficient than Canada's. Could those three facts explain why, everything else being equal, companies prefer to invest in the United States rather than in Canada?
As Senator Carney has stated, the figures are startling. Our percentage of Japanese investment in Canada is not commensurate with our size in relation to the Americans.
Mr. Hara: You are talking about the 10-to-1 ratio?
Senator De Bané: Or perhaps a 12-to-1 ratio. When we look at that, there is no doubt there is a big discrepancy. I was wondering if the discrepancy could be accounted for by the fact that many of the states, such as Carolina, for instance, have barely 5 per cent of their work force unionized, whereas in Ontario and Quebec it is a lot higher. Would the fact that our taxation rate is higher, and that transportation here is less efficient and more costly, explain it to a certain extent?
Mr. Hara: You mentioned transportation costs. Yes, that would be a factor, but that is a given. That is taken into account when making a feasibility study. Regarding labour, that is a cost of doing business. We have 16 joint ventures in Canada that are doing well.
Senator De Bané: When you take into account the exchange rate between the two currencies, the American and the Canadian, and then you add to it the productivity factor you realize that the Canadian worker costs about 40 per cent more than the American, and that is a given. If it is less costly to do business in the United States, of course you will go there.
Mr. Hara: But there are several offsetting factors. For example, Canada has a better educated work force. If you are going into a joint venture that is rather sophisticated, you go to where you have a well-educated work force, and that is Canada. I do not think Canada should take a back seat to the United States in that respect.
Senator De Bané: What explanation can you give to Senator Carney?
Mr. Hara: There is a bigger population and there is a bigger market there.
Senator De Bané: Taxation rates?
Mr. Hara: The taxation rates differ by the province, but there is that perception that taxation rates are the highest in Canada, depending on the province. From my perspective, however, that is the cost of doing business. There are other countries we could go to, but we would much prefer to be in Canada. You have to build all these factors in. Every country has its ups and downs. If you want to do business in a country, you accept what that country is and you make a go of your operation. It is very simple.
The other perception -- I am saying "perception" because it is not fact -- is that there are key labour disruptions. That is a perception that is held, but it is not true. From reading figures from Statistics Canada it can be seen that the number of strikes is not as large as people perceive it to be. But, for some, perception is reality. How do you overcome that perception?
The Chairman: Senator Carney, may I call your attention to an article by Keith Head and John Ries, Faculty of Commerce and Business Administration, University of British Columbia, entitled "Rivalry for Japanese Investment in North America." It is in a volume edited by Richard G. Harris, The Asia Pacific Region in the Global Economy: A Canadian Perspective. There is a discussion of the labour market conditions and market access.
On page 104 there is a very interesting table dealing with the competitiveness of the states and the provinces and the probability of attracting new investment in all manufacturing, in motor vehicle parts and in the pulp and paper industries. Let us start with pulp and paper. The first Canadian province that shows is in tenth place, and that is Quebec.
Senator Carney: Competitively?
The Chairman: Yes, competitiveness in attracting investment. It is tenth from the top. Washington is in first place.
For automobile parts, Indiana is first, then Michigan, then Ohio, then Illinois, then Kentucky, then Tennessee, and Ontario is in seventh place. Going to all manufacturing, the first province that shows is Ontario in thirteenth place.
Senator Carney: Who is on top?
The Chairman: California. It is a very interesting chapter. It may not be entirely accurate, but that is another question. I think it is one that members of the committee will want to look at. I wish we had read it before the witnesses appeared before the committee.
Senator Carney: Is Nova Scotia on the list, your home province?
The Chairman: As far as pulp and paper is concerned, the Canadian provinces are, first, Quebec, then British Columbia, then Ontario. We then drop down to number 34, Newfoundland, followed by Alberta in the thirty-ninth spot and Manitoba in the forty-eighth spot. New Brunswick and Nova Scotia come in at 6 and Saskatchewan is 58.
Senator De Bané: Mr. Chairman, the three factors I mentioned about productivity, the unionized work force and transportation are from this article.
The Chairman: But notice what they say in here. After mentioning unionization they have a sentence, "The importance of these factors to Japanese investors, however, is debatable."
Senator De Bané: They have managed more easily in the United States in that not one Japanese car manufacturing plant in the United States is unionized. All of them are non-union.
Mr. Yamagata: Canada still has very good Japanese investment. One sector is for automobiles in Ontario. Honda and Toyota have a good, large operation there and the incentive to expand. Honda will be expanding to 240,000 or so and Toyota will be 120,000, or something like that.
The other sector is the pulp industry. Those are two successful cases. There are 400 Japanese companies across Canada that have offices in operation, but manufacturing is quite a small number compared to the United States. I am always thinking of the 1.1 per cent to the 42 or 45 per cent. The Japanese perception of Canada as an investment destination is perhaps not reality, but the perception is that Canada is a very costly country for manufacturing. In many ways it is costly. Perhaps taxation is one of the factors; labour costs could be another.
A recent report from KPMG compared 15 cities in America and Canada, seven or eight in each. In the case of British Columbia it was Langley. Seven factors, such as labour costs, power costs, land costs and taxation were compared. Out of those seven factors Canada had six cheaper than those in the United States. This tax comparison is very technical and professional and, when comparing, it is difficult to tell which is higher; it depends on the technique. I do not know if the KPMG report is dependable or not, but still we have the report.
On a corporate basis, taxation may include benefits, which is the company's burden. The conclusion is that Canada has cheaper taxation. This fact should be advertised more. Japanese have the image that Canada is more expensive than the United States. We have NAFTA, it is a freer, more borderless age. If everything is cheaper in Canada, why not set up a factory in Canada? They should, but they have not. The reason is that there is a wrong perception, but the perception is not the reality. This perception on the Japanese side has to be corrected.
I mentioned the inconsistency between industrial policy and legislation. This is a very negative factor for the Japanese. Their general concept is that Canada is inconsistent. We can go there and get approval, but at any time it may be changed. This is happening, but of course both sides have their own logic.
The Chairman: I was going to ask you this, when you made your initial presentation about changes in policy. Do you mean primarily at the federal level or the provincial level?
Mr. Yamagata: I mentioned three cases, Windy Craggy mines, the Kemess project and the Kemano project. Those are all happening at the provincial level. Another case is B.C. Trade. Four or five years ago B.C. Trade opened an office in Tokyo and another in the Osaka area, but they are now closed. Of course there is the problem of the deficit, which is very important for Canada, but still it gave a certain impression, and then after three or four years the government changed and the offices closed, and that gave another impression. It is inconsistent. We have to clear up this gap of the different perceptions, or the reality and the perception.
Senator Perrault: Mr. Chairman, I had marked the lead page as I was taking notes: "Good constructive suggestions and ideas." There has been some excellent material presented here and I appreciate the fact that these witnesses have appeared before us. Mr. Hara has done a great deal much to develop relations between Japan and Canada. His efforts have been heroic and very successful.
I wished to ask Mrs. Copithorne a question. You talked in terms of the importance of knowing something of the language and culture of these Pacific Rim nations, and I agree with that heartily. What initiatives are there in the Japanese school system to do that? Are there lessons we can learn from Japan? Do they have large classes learning the various languages, Thai and Malaysian?
Mrs. Copithorne: As far as the language learning method is concerned, I do not recommend the Japanese school way of learning languages.
Senator Perrault: They do not have separate classes?
Mrs. Copithorne: They do have private schools and separate special classes after school hours.
Senator Perrault: Do you have a model that you would suggest to us?
Mrs. Copithorne: Weekend classes? They are learning more from the way we teach, what we call cross-cultural communication. Learning only language does not make you able to communicate, because you have to know the cultural elements to be able to use the language to communicate. For communications purposes Japan is actually learning a lot from North American models.
Senator Perrault: But you are equipping young people with the task of going out and seeking these markets for Japan at some point in their lives?
Mrs. Copithorne: Yes, and they do come to North America to study how language is actually used. That is the best way. We should be sending more kids from here to Japan.
Senator Perrault: You talk in terms of cultural exchanges. Let me inform you that it is not the Vancouver Symphony, the Toronto Symphony or even the Winnipeg Ballet, but the Vancouver Canucks who will training in Tokyo next year. I hope they bring back a defenceman.
Mr. Hara: Senator Perrault, if I may comment on your point, there is a program in Canada called Co-op Japan, which started out with a dozen -- it is up to 20 or 30 now -- third-year university students in science and engineering who are sent to major Japanese companies in Japan to work for a year, which will count towards their third-year credit, and then they come back and will graduate. Initially, the Japanese companies were reluctant to accept these students because they did not know what they were getting. This started in 1990, but today the demand exceeds the supply. More Japanese companies want these wonderful Canadian, third-year engineering and science students for their labs and workplaces than can meet the demand. I am telling the managers not to drop their standards to meet the quota. If they keep up the standards they will continue to get these wonderful students. One female student From Simon Fraser University did so well in Japan that the company -- and it is one of ours, to boast -- wrote to her and stated that they were going to name her as co-author of a research paper on a new discovery. That type of program will give Canada a very good reputation.
Senator Perrault: Mr. Yamagata, you brought along some material. Do you have extra copies of those statistics? I know you were quoting from the written report, but you also presented other material.
Mr. Yamagata: Yes, I have. Would you like that?
Senator Perrault: It would be very helpful, because it was excellent material.
Senator Grafstein: The witnesses have set out in graphic detail our policy and perception deficits. When I listen to the totality of the set of problems between Canada and Japan and examine the relative wage scales and taxation issues, then move to the more dynamic action on the part of government through the private forum, the Japanese forum and through our own action plan, it strikes me that if we are interested in breaking these perceptual and policy barriers we should suggest that we enter into active negotiations for a free trade agreement between Canada and Japan.
We are presently engaged in a free trade negotiation with Chile. It certainly makes much more sense, having in mind our chronic trade imbalance and the cost structures in both Japan and Canada, that this would be a very useful policy exercise. It would cut through a lot of these issues.
I was interested that one of the groups, the forum, was taking up the issue of a bilateral mechanism to settle trade disputes. If we consider to the rationale for the first free trade agreement between Canada and the United States it was precisely to have a mechanism in place that would solve trade disputes on a rational basis. We do not have that, other than through the WTO, which we all know has huge deficits and problems in its practices.
Would this not bring to the top of the political agenda all of those issues in both countries? If this were a Canadian initiative, how would this be perceived and accepted from the Japanese side?
Mr. Hara: That is a very difficult question. However, senator, there are no problems, only challenges. I cannot speak for the Japanese government. I am a Canadian.
Senator Grafstein: I understand. I am asking you to answer based on your perception.
Mr. Hara: Based on my perception of Japan I do not think the Japanese government would go into a comprehensive free trade agreement. Its basic philosophy is to maintain a multilateral approach rather than a single approach. Perhaps if the sector were defined, be it the binational or bilateral dispute resolution mechanism or something that is specific, although I know there would be great challenges in this, that might be one approach. I cannot speak for the auto sector either.
If I may backtrack, after the Second World War Japan went through three distinct phases. The first was immediately after the war. In their wisdom they decided to de-emphasize labour-intensive industries such as textiles, and those were moved offshore. They decided to concentrate on capital-intensive industries such as the steel industry and the car industry. That phase is gradually being de-emphasized, and you will notice that that is taking place because the auto plants are being moved offshore. They are now in the phase that would be called the knowledge-based industry sector.
The other issue facing Japan is that it has a rapidly aging population. If I recall correctly, the population in Japan is going to peak in the year 2007 and then there will be a gradually declining population, which means that there is no young work force up and coming. The birth rate in Japan is only 1.4, and that is even below Canada's. From that standpoint where are the auto manufacturers going to get their continuity of young working people? Would that be an incentive for them to further establish their car-making plants abroad? If that is the case, why not in Canada? Canada has a job to do to entice Japanese auto makers to come to Ontario, for example, and either expand or establish new plants there. That is always bearing in mind that there is a NAFTA or a free trade agreement with the United States.
Senator Grafstein: Mr. Hara, I started with the strategic level, which was the free trade agreement, and I appreciate your moving to the next level, which is managed sectoral trade. One consideration is the automobile sector. The second one that I thought had a natural affinity, and that would have a positive impact for both, would be the telecommunications sector. Canada is well positioned there. Then there is trade, another sector that could be handled. Pharmaceuticals and chemicals are a huge sector that are all value added and would provide a tremendous impact for both countries. Perhaps your groups might consider that.
I hope that when we look at our recommendations our committee will take a hard look at that, if it makes sense. It strikes me that we are coming at this as amateurs. Hopefully by the time the Chairman is finished with us we will be more than amateurs.
As we look at going into this area, we have to "think smart" because we cannot be all things to all people in Canada. It strikes me that between Japan and Canada there is a natural affinity that we have not quite utilized, and each of you have said that in your own way quite articulately. We have not made the connection yet; our numbers are terrible; so obviously there is some political will that has to be brought to bear to solve some of these problems.
Those are the tactical issues that come to my mind; if there are others that you can suggest to the committee, that would be useful; if this "managed trade sector" idea is not a good idea, however, perhaps you can give us the alternatives. That is what we are searching for. We are searching for answers.
Mr. Yamagata: I agree with Mr. Hara that the policy of the Japanese government is not to make a bilateral free trade agreement. At this moment they are more in favour of aligning themselves with GATT. In Asian trade and investment the Japanese presence is quite high, but even though there is discussion and concern about the possibility of an Asian free trade agreement, it would not be realistic to consider it for another decade or two. It is not that I think it will not happen, or that it is not economical to make such a regional free trade agreement; it is just that it will take time.
The Japanese image of Canada is that it is not a place for setting up manufacturing. That is a general concept or image held by the Japanese people. It is actually not correct. There are numerous Japanese ventures here in Canada. Japanese automobile and automotive parts companies are successful. In British Columbia, pulp manufacturers and lumber companies are operating.
Manufacturing petrochemicals or chemicals, however, is most unfriendly image-wise; it is an environmentally unfriendly industry. So we have to look at value-added goods, such as pharmaceuticals, biotechnology and software. We have to focus on some good industries which Canada should look at to invite Japanese or Asian companies to become involved in.
One other comment I would make is that there are two sides to investment; one side is market-oriented and the other is cost-oriented. Where there is a market, investment will happen. If there is a place where the cost factor is quite low, then investment will go there. At the moment the Japanese are going mostly for the cost-oriented side, as well as the market side. The market is North America, with NAFTA. Canada has a population that is thinly dispersed over a big area; so, if it is borderless between the United States and Canada, perhaps the Japanese would prefer the market place with more population, and that is the United States. That is logical.
Mr. Hara: Mr. Chairman, to add to my colleague's comments, first of all I believe the term "managed trade" is not that well thought of in Japan. You should find different terminology for that. "Sectoral exchange" might be a better term.
Almost all Japanese direct investment in Canada, or in any country, is export oriented. The primary criterion is an export market. The home market in Canada is an ancillary part of that because it is so small.
There are two broad types of manufacturing. One is called economies of scale, where you try to get the lowest unit cost. The other is called economies of scope, where you do not have long lines, but much shorter lines because of changing technology and you are geared up to be flexible so that when your product, which is a rather sophisticated product, becomes obsolete or seems to be obsolete you have something else coming down the pipe.
There are differences between economies-of-scale investment and economies-of-scope investment. With the small population that Canada has, perhaps we should concentrate on the economies-of-scope manufacturing, where the consumer does not ask how much something costs, but asks how good it is.
Senator St. Germain: I wish to compliment our three fine witnesses for their excellent presentations. I am not surprised, of course, because I have known Mr. Hara for many years and I have previously had the good fortune to hear Mr. Yamagata and Mrs. Copithorne, who set out clearly the problems Canada has in promoting itself.
It is clear that the Americans have outdone us. They have 36 state offices in Tokyo; we no longer have any. It is clear that we are out-marketed and out-sold. However, Mr. Yamagata has clearly laid out what we have to do to get into that market.
The question I have relates to culture. Correct me if I am wrong, because I am no expert in this, Mrs. Copithorne, but is there any question that the Japanese culture is more clearly defined than the Canadian culture? It is an older civilization. It is much clearer and easier to define. We have various cultures in our country because of the regions that were pointed out earlier. We have our aboriginal culture. We have a clearly Quebec, French-Canadian culture. The other cultures are quite varied. I am from Western Canada, originally, from Winnipeg, but now I live here, and I know how vastly different those places are.
In your presentation you said that exchanging cultural values is key to doing more trade and establishing better relationships with Japan. The Americans are doing very well yet they also have a diversified culture. What should we be doing? Knowing our culture, can you assist us in making a recommendation as to how we could bring it to the forefront in a more presentable package? Japanese culture is clearly defined. From your perspective, knowing what you know about our country, how we do define ours?
Mrs. Copithorne: I mentioned that one of the important recommendations that the Canada-Japan Forum 2000 made was to establish an endowment fund to be called the Japan-Canada Fund for Mutual Understanding. That would involve more long-range planning. I am not looking for exotic cultures, but more toward developing cultural relations between Canada and Japan in terms of educational and cultural exchanges. Of course everything costs money, but it is important to have a fund on which to base our long-range planning. That is one very important aspect of a cultural relationship today.
When you look at the relationship between the United States and Japan, they certainly have a U.S.-Japan academic and cultural relations endowment fund, a huge amount and for a long period of time, and it is a growing relationship in that sense. Ours is still at the very ad hoc level and without planning.
Cultural industry people and educational institutions must get together and discuss this. Indeed, what you said about Japanese culture being more defined, older and traditional -- clearly what is Japanese and what is not Japanese -- is quite different from the way that Canada is today. Something like people with different backgrounds co-existing in society is a very important image to send out to Japan, rather than simply sending an indigenous peoples' art exhibition, or the Toronto Symphony or even Murray Schafer. Send an image of the real Canada and what it is today.
Let me give an example. We are planning to take an exhibition of Canadian children's literature and story telling from Canada to Japan at the end of this year. The purpose of this is to show to the Japanese how different people actually live, what sorts of stories we have and what sorts of values we send to our children. What do we teach our children about environmental issues and about living together? That is very important. That is what the Japanese people want to hear from Canada. One area we have to work on is to ask the Japanese what they want to know about Canada.
One area the editorials focused on was not the trade issue, but the human element and the multicultural issue. Japan is a very monocultural, monoethnic society. We want to show to the Japanese people from our crosscultural communication point of view an example of people living together.
Mr. Hara: As you well know Canada has a wonderful institution already in place, which was established by the parliament of Canada on June 14, 1984, called the Asia Pacific Foundation of Canada, whose mandate is to promote better understanding between Canada and the nations of Asia Pacific and to have a mutual two-way flow of dialogue, which includes the private sector, culture and education. If we are really serious about Canada's role in the Asia Pacific region, I would suggest that the foundation be supported.
The Chairman: We note that Senator St. Germain is prepared to support the foundation.
Senator Lawson: Mr. Hara took us through the problems of investors being met with the maze of government bureaucracy. Mr. Yamagata talked to us about perception. I do not know how many of you picked this up on the wire service a couple of weeks ago, but it seems to be right on point. On Monday, in London, the English announced that they have invented a new heat laser that will revolutionize industry. On Tuesday, in Moscow, Russia announced that the new heat laser England invented yesterday, the Russians had invented two years before. On Wednesday, in Washington, the United States announced that they had obtained patents from England and will have new heat lasers on the market in 60 days. On Thursday, in Tokyo, the Japanese announced that they had perfected a new imitation heat laser and would flood the North American market in 30 days. On Friday, in Ottawa, the Prime Minister announced that he would be calling an emergency session of parliament to determine whether heat lasers would fall within federal or provincial jurisdiction.
Senator Stollery: Mr. Chairman, this has been a very interesting discussion. I was following earlier the discussion about Canada appearing to fall behind in attracting investment generally, and we were discussing Japan in particular. Before we left Ottawa I was told by one of our witnesses that we do not have a great many trade problems with Japan. The issue of free trade agreements was being discussed. In listening to the business about the competition for investment in Japan between Canada and the United States, it strikes me that this whole question of global investment has not been dealt with by government. The United States has 50 states. I am sure they all have different tax regimes. We have 10 provinces. That is 60 jurisdictions with different tax regimes competing for investment.
The Chairman: And municipalities.
Senator Stollery: Yes. The complexities of tax regimes are not particular to Canada. Anybody who is familiar with New York State knows that the population is declining and the investment is going to New Jersey and other parts of the United States. I am not really surprised by the competition in this unregulated global financial community, this unregulated global financial competitiveness for investment.
At the same time we hear that our market share is dropping, but it is not dropping against other industrialized countries. In fact it is in Asian countries, the countries of the Far East, that the market has been developing, and the older, industrialized, countries' market share is being replaced by local manufacturers and traders in the Far East. I do not think that issue has been dealt with, and I think it will have to be dealt with by government, but not by any single government, because that would cause capital flight. It will have to be dealt with, however, because the workers cannot move; it is the capital that moves. The government in Tennessee goes to Japan, or other countries, and competes with the government of California, Washington or Ontario for money to employ their citizens. This is done in a rather chaotic way, as far as I can see.
In this rather disorderly financial environment, what is the effect on the bond situation of the fact that the United States, with a savings rate of 5 per cent, which is the lowest in the world, cannot finance its own investment? Its own investment is financed to a large degree in Japan and has been for some time. The Japanese bond holders are an enormous financial factor in the world today. There must be thousands of them. We are all familiar with the fact that Japanese financial owners of stocks and bonds are famous. Women, housewives, are very involved and it is a famous phenomenon. I wonder if the fact that they already own so much U.S. investment in the form of bonds is a factor as to where they continue to invest their money.
Mr. Hara: I do not think that there is any linkage whatsoever. Our company would not pay attention if some financial institution held X number of dollars in Canada in bonds or T-Bills. It would not have any impact on our decision. None whatsoever.
The Chairman: Honourable senators, I am sure we all want to thank the witnesses for a most interesting discussion.
There are some questions that are still somewhat unanswered, but you have gone a long way in defining the questions and prescribing the answers. We are most grateful to you.
Our next witnesses will deal with investor questions. Mr. Danny Gaw is from M.K. Wong & Associates Ltd. I do not have a biography of Mr. Gaw so I cannot say all the good things about him that ought to be said.
The second witness is Mr. Michael Johnson, the president of the Vancouver Stock Exchange. Mr. Johnson has had a long and distinguished career in the financial field. He was formerly a director of Trust Companies Association of Canada, a trustee of the Trust Companies Institute, Commanding Officer of the 78th Fraser Highlanders and a member of the Hockey Hall of Fame advisory board.
Since I do not have a biography to put on the record, I will ask Mr. Gaw to tell us one or two outstanding things about his career.
Mr. Dan Gaw, Member of the Board, Laurier Institution: Mr. Chairman, I immigrated to this country in 1982 from Thailand. I have worked in quite a few Asian countries, Hong Kong, Singapore and also in the United States. Since 1982 I have been living in Vancouver, involved in the manufacturing business -- a bakery, producing bread and doughnuts. I am on the board of the Laurier Institution, and I will be representing Mr. Milton Wong, of M. K. Wong & Associates Ltd., who is sorry he could not attend.
The Chairman: You are here from the Laurier Institution, rather than from M.K. Wong?
Mr. Gaw: That is correct.
Mr. Michael Johnson, President, Vancouver Stock Exchange: Mr. Chairman, I wish to give you an update on some of the things we have been doing with our Asian initiatives. The VSE is Canada's Pacific Rim stock exchange. We represented annual trading last year of over $12 billion dollars, but in share volume and the number of trades we are the fourth busiest exchange in North America after New York, NASDAQ and Toronto. The average value of our shares is generally less than $2.00 and that is why the activity is much higher, but it is a lot of little shares. Currently, we have 1,500 companies listed as active on every continent. We raised over $2 billion last year for new enterprises. Our investors are in Canada, the United States, the Middle East, Europe, Africa and the Asia Pacific region. The VSE does not compete with other stock exchanges; rather we are a venture capital exchange, and companies start on the VSE and often graduate later to senior markets, such as Toronto and NASDAQ. In the last five years, 20 per cent of the new listings on the TSE were graduates of our exchange.
For Asian enterprises we are uniquely positioned as the gateway to the North American capital markets. In terms of our role as a venture capital market, our niche is venture capital; hence the slogan for the VSE is, "Where business starts." We are the place where new ideas and opportunities begin. Our listing requirements are specifically designed to attract and accommodate these start-up ventures.
We began in 1907 as a regional resource exchange, providing financing largely to mining companies exploring for British Columbia's mineral wealth, who had few other options to find the capital they required. Ninety years of experience has developed a venture capital expertise for mining in Vancouver, not only in the exchange and our member firms, but the professional infrastructure in this town and the mining industry. Financing mining exploration and development has given us an appreciation of risk and reward which continues to be central to our business today.
Today we have leveraged this expertise in mining to enter high tech and biotech fields as well. The things we have found in common are that there is a risk orientation towards the development-stage projects, in their scientific exploration at the root of the project, and there is a higher expected return for a proportionately higher risk. Out of that speculative tradition we have carved a niche which is not well served elsewhere.
For the Canadian financial markets the VSE provides a competitive advantage in that we offer the only organized, established, venture capital market in the world. Our role in the world markets is that now we are taking this expertise we have developed into the international markets and we believe great opportunities exist in Canada and around the world for the VSE. There is a great need internationally for a stock exchange dedicated to raising venture capital for new businesses and projects, and we are recognized today as the world leader.
We are unique among world exchanges in this specialization, listing companies in the early stage of their development. Through expansion of our relations in the Asia Pacific region we intend to take further advantage of our unique role in world capital formulation. Our initiatives in Asia started where we had a long association, both culturally and commercially.
As you will appreciate, Vancouver is a primary gateway to the Pacific. We complement the Asian diversity with the diversity of Vancouver. The community is familiar with languages, customs and the needs of businesses located in Asia Pacific centres, such as Hong Kong, Singapore, Indonesia, Taiwan and China. The VSE has made significant inroads in the region with exploratory marketing efforts going as far back as 1987. Early forays into Asia by the VSE and its member firms included the establishment of our first representative office in Hong Kong, and gradually this ad hoc initiative started to generate listings in the early 1990s.
In 1996, being new to the exchange myself, we started to evaluate a lot of the initiatives we had ongoing and the functions to understand why we were doing them and whether they were successful and effective. We determined that, for a modest investment on the part of the exchange in terms of marketing expenditures, we had generated 33 companies or listings that had raised financings of over $209 million, and today have a market cap approaching $700 million.
From this analysis we developed a template for international marketing. Initially, to determine if we want to go and do business in a particular country, there is a need to do preliminary research. Then we do expeditionary marketing trips, where we utilize the Canadian consuls and trade commissions. I might add here that, uniformly around the world, they have been very helpful to us and consistently good. We believe personal contact is crucial, because it is important to learn and understand the cultural environment, the differences in business practices, to meet the securities commissions, the stock exchanges, brokers in those countries, and even prospective listed companies, as we try to gauge the opportunity. Based on that we build a business case where we are able to then determine what the marketing initiatives and the potential ought to look like. Based on that we develop member firm interest and participation.
Recent initiatives have included two broker trips to Hong Kong, Taiwan and China in 1993 and 1995, and, in 1996, a further broker trip to Australia. Establishing relations with foreign regulators in Hong Kong, Taiwan and China and, most recently, Australia, has also been part of that. Regular marketing trips, calling programs, by senior exchange staff three or four times a year into these markets is necessary in order to maintain our previous relations, forge new ones and give us an on-the-ground understanding of the activity level and the interest that is there.
Expeditionary marketing trips to new Asian markets to assess other business potential continue. We have also hosted dozens of delegations from private business to Vancouver, and business and government representatives for Asia Pacific countries. We have been presenting and exhibiting at a number of high-profile Asian trade shows and conferences, international chambers of commerce, including a keynote speech last fall at the Money World Asia presentation in Singapore.
We have also launched North America's first securities trading board for companies in the Asia Pacific region. I gave you some of the numbers involved in that today. The background, in terms of what we now call the Asia Pacific board, is that in 1992 we were originally working only in China, with the People's Bank of China and the Shenzhen Stock Exchange, looking at secondary listings of Chinese B shares. However, regulatory changes in China led to restrictions on listings for foreign markets. We had to re-look at our strategies and still play in the market. We developed new strategies in 1995 and established the Asian board with an initial group of Chinese joint venture junior industrial companies. Our brokerage firms began to learn how to syndicate, which is not normal in the junior firms although it is quite common in the senior markets with the more national firms. This was in order to finance the early Asian deals.
For instance, a deal was done last year with Sinorank, in which they raised $5 million dollars. There were four or five brokerage firms in this market; the deal was oversubscribed and a good success. The same firms and others are meeting regularly now to share information on foreign deals and are still interested in syndicating deals in the Asia Pacific region, particularly in Australia, as we learned on our trip last August. Now we are looking at program growth and refocussing.
In 1996 we broadened the board to include mining companies in Australia and Indonesia, as well as non-resource companies from other areas. We renamed it the "Asia Pacific Board" to represent the diverse selection of companies from throughout the Asia Pacific region. Augmenting this board in the past year we had an additional 24 companies come in from Indonesia, and we raised $76 million, with a market cap today of $282 million. From Australia there were 38 companies. The financing is $234 million, with a market cap of $1.682 billion. If you add up the previous numbers I gave you with those, you are approaching $2 billion, which is about 20 per cent of the exchange's total market cap.
This is a very meaningful part of the activity on our exchange. These ventures are engaged in mining exploration and development through Southeast Asia, with the majority in Indonesia and the Philippines. A growing number of resource companies are starting ventures in Mainland China. Included are 12 inter-listed companies on the Asia Pacific Board that are new listings on our exchange from the Australian Stock Exchange. We have noted that the capital-raising process for small companies has been deficient in Australia since the time of the merger of their exchanges into a centralized market in the late eighties. We have also noted that it is difficult to raise public funds in Australia for ventures off shore. This is borne out by the fact that only one of our Australian listings has an Australian property as its primary asset. All the rest are exploring throughout Southeast Asia, as, indeed, are the Canadian mining companies.
If it would be helpful, there are some examples I can give you of the Asian companies. Our board has dealt with a number of prominent business people on both sides of the Pacific -- some of China's showcase private companies, the Stone Group. Some of the most well-known and established Hong Kong families, Fung and Li Ka Shing, as well as leaders in our own community such as David Lam. Business here shows that the current generations of the Fungs, Lis and Huis, whose family fortunes were made in the Far East, have now become major forces in Canadian businesses operating out of Vancouver, and we are encouraging them to do business on the VSE.
Among our first Asia Pacific board companies is Fairchild Investments, who operate a vitamin C factory in China in partnership with the Stone Corporation, one of the largest private technology companies in China with domestic and international interests in electronics, machinery, telecommunications, aeronautics and pharmaceuticals.The Canadian side of this joint venture is backed by Thomas Fung of Vancouver, a member of the Fung family of Hong Kong, well known for their merchant banking operations. The Fungs are major shareholders of the Fairchild Media Group in Canada, which includes: Fairchild TV, Canada's only national Chinese language television network; four Chinese language radio stations in Canada; one magazine, and a shopping mall that is the nucleus of a $150-million "Asiatown" complex in Richmond.
One of the founding investors in the Chinese joint venture is the former British Columbia Lieutenant Governor, David Lam. Another company is Burcon Developments Ltd., which began as a small, local Asian-backed real estate brokerage company run by Aaron Ip of Vancouver. In 1996 it entered into a number of acquisitions in partnership with a Hong Kong group which has now propelled it into one of the largest real estate developers in Canada. The largest shareholder is now International Tak Cheung Holdings Limited, a Hong Kong Stock Exchange listed company. During the past year it acquired the bankrupt TSE listed Oxford Properties, and through that company acquired the real estate portfolio of Marathon Realty in partnership with GE Capital. More recently it has announced the acquisition of Vancouver's Expo site from Concord Pacific Development, owned principally by Li Ka Shing and the Hui and Lin families of Hong Kong and Taiwan, which purchased the site from the B.C. government in 1988. On closing the Expo deal, Burcon's principal beneficial shareholders will also include Huey Tai International and its subsidiary, Asean Resources, and the Hui family's Vancouver-based Adex group.
We have found over the years that we have had good federal and provincial government support as we have worked with many of the Canadian consulates, including those in Asia, in jointly researching markets, staging events, hosting groups and responding to the media. They have proven to be invaluable for the VSE in providing local knowledge, resources and facilities. We have also worked closely with the British Columbia trade offices in Asia, particularly in Hong Kong where their contract agent is also the VSE's representative. The results are expertise and ready access for businesses and the media.
The VSE was part of Team Canada '95, travelling with Prime Minister Chrétien; it was also part of Michael Harcourt's last trade mission to Asia, where we saw great opportunities for real growth. We returned with renewed enthusiasm for Asian expansion and a number of new deals, some finalized and some in the works.
In February and March of 1997 we intend to participate with the federal government in Natural Resources Canada in a series of Asian seminars on mining in Canada to be held in Taipei, Singapore and Hong Kong, as well as in Sydney, Melbourne and Perth, Australia. In November of 1997 we intend to participate in the APEC event in Vancouver, in any way that it suits the group, and hopefully we can be very helpful.
The following are some general issues involved in doing business that have been mentioned in conversations with people we have met over the years.
The level of tax in Canada is often cited to us as an issue. As important to an offshore investor is tax applicability. For example, the applicability of tax to a majority greater than a 25-per-cent shareholder of a Canadian public corporation has caused a great deal of effort to keep corporations offshore and avoid the use of Canadian registered companies. Taxes that potentially apply to non-resident majority shareholders simply because the Canadian corporation seeks to access Canadian capital are characterized as confiscatory.
Other countries have their own barriers to free capital flow among stock exchanges, such as Australia's Stamp Tax duty, which applies to Australian listings in Canada, and China's limitations on the listing of B shares in foreign markets. These barriers that are specific to financial flows are concerns.
Offshore assets present another problem. The requirement to report assets held offshore over $100,000 has an effect on all Canadian international business that is beyond our venture capital market perspective. It is generally assumed to be a first step in increasing taxation and damages Canada's reputation as a friendly destination for foreign investment. This appears to be particularly negative considering how it follows closely behind our country's aggressive immigration campaign, which pioneered techniques that are now copied by the United States and Australia in competition for the new entrepreneurial citizens.
Recently we have had a number of discussions with people, and particularly a couple of brokers in Canada who have business in Canada in other lines. They have residences here in West Vancouver. I have also spoken to some businessmen in Indonesia. A common theme on the tax burden is that they cannot reconcile doing business here with doing business in their own part of the world where they have larger markets and much less of a tax burden. One Indonesian businessman related to me that he views trying to double his money as being about a three-year project, which, given our tax structure, is just about impossible. Therefore, he does not feel an incentive to do it. Similarly, you have the reticence on the part of others. They want to establish a beachhead here; they want to be able to do business, but they are looking more at having enough here so that they can structure and then bridge the Pacific with their own business opportunities, as opposed to coming in here in a more meaningful way. Their comments have been about the National Securities Commission.
I am making comments here strictly as an observer dealing with offshore investors and businesses.
Our system of multiple registrations and filings to access a relatively small capital market is seen as negative. The recent British Columbia and Alberta agreement to cooperate in securities regulation is a step in the right direction, but there is a need for a coherent, unified system that also incorporates the major players in the senior markets in the east as well as accommodates the venture markets in the west.
Current legislation establishes Montreal and Vancouver as international banking centres, but limits the financial institutions eligible to deposit-taking institutions only. Expanding the definition to include other types of offshore financial services would be beneficial to Canada and to Vancouver by promoting increased trade links with other countries, particularly the APEC countries. Our vision is simply a strategic thrust, recognizing the importance of specialization. We are a niche player and we intend to remain on top of our game.
Looking at some ratios in the exchange today and at the mix of our investors, 75 per cent are retail and 25 per cent are institutional, almost the flip side of what is seen in the senior markets such as Toronto. Today, listed companies are 70 per cent domestic and 30 per cent international; resource-based are 80 per cent and 20 per cent. It is my objective, over the next number of years, to move that to 50/50 ratios for each. I am not talking about shrinking the larger number; I am talking about seeing opportunities to continue to grow on both fronts, but more aggressively on the lower ones.
Looking to Asia will be an important part of our future. We will continue to pursue opportunities in the Asia Pacific region . We are also blessed by a geography that spans and bridges the time zones of Europe and Asia. In concert with our member firms, e will seek out new ways to expand our markets, striving to attract quality Asian companies requiring venture capital. We will market aggressively to bring this business to Vancouver from foreign jurisdictions to make the VSE the hub of international venture capital.
To aid us further in 1996, we commenced pilots of two new programs to improve our international links with the Asia Pacific region. The first is a program known as International Associate, which is a new form of market participant with the VSE that will allow foreign brokerage firms to trade on our exchange. It provides access to the VSE's unique, fully computerized trading system and gives firms the ability to participate in underwriting syndicates and complete share distributions. It has a low cost of entry. The first such IAs are expected from Hong Kong and later from Australia.
Another program we introduced is the Vancouver International Securities Trading Access, or VISTA. This provides a new evening trading session in Vancouver. It enables realtime trading on the VSE, which coincides with the next morning in Hong Kong and Australia. It consists of a two-hour session with a select group of VSE stocks, now numbering 75, all with substantial operations in the Asia Pacific region.
In summary, our Mission Statement is to be an honest, fair and efficient market for venture capital. We are leveraging our venture capital expertise, and we will continue to provide access to capital for new companies, both domestically and internationally. This is the Vancouver Stock Exchange, where business starts, and we are committed to being Canada's Pacific Rim stock exchange, serving the Asia Pacific region.
Mr. Gaw: Today I am going to talk about the importance of the Asia Pacific region to Canada's economy. After the United States, the Asia Pacific region is the most important recipient of Canadian goods and services.
Canada's exports to the Asia Pacific region increased by 32 per cent from 1994 to 1995, the value being worth approximately $27 billion. The figure for 1993 was only $16.6 billion. Hence, over those few years, the increase has been quite substantial.
Of the exports to Asia, Japan occupies about 40 per cent of those figures. In 1995, they represented an increase of 24 per cent from the year before. The year before was worth $12 billion.
Canadian exports to Singapore, Malaysia, Thailand and Indonesia increased by 47 per cent. The increase rate is much faster, but the value is still much lower than Japan. The value was only $2.3 billion in 1995.
A few concerns need to be addressed. Canada is in a trade-deficit position with the Asia Pacific region. In 1995, Canada imported $6.1 million more goods and services than we sold to the Asia Pacific region. The second issue is that over the past number of years, Canada's shore of trade in the region has declined relative to other countries.
In 1987, Canada supplied 2.4 per cent of Asian imports. In 1995, this figure went down 33 per cent to 1.6 per cent. These figures are supplied by the Canada Asia Review. This is a situation that Canada needs to rectify. Certainly in the last couple of years, the Team Canada missions have been very helpful in trying to rectify this deficit.
I will now profile Canada's economic relations with the Asia Pacific region by dividing it into three sectors: the trade in goods; the service sector; and the economic benefits of Asian immigration to Canada.
Traditionally, Canada's exports to the Asia Pacific region consists primarily of semi-processed materials, such as lumber, wood pulp and paper, cereals, fertilizers and minerals. Over time, our exports of manufactured goods, such as machinery, plastics, aircraft and precision equipment, has increased. But to redress our trade imbalance with the region, Canadians need to more aggressively market value-added goods to the Asia Pacific region. This is true of sectors such as agricultural food, as well as more well-known, high-order categories such as aeronautics. Canada's airplane industry is coming up very fast.
Japan, being the largest trade relationship with Canada, is also the largest market for imported fish products. To overcome the increasing cost of production at home, Japanese companies have invested in fish and seafood processing facilities in Canada. They have also set up automobile manufacturing plants here.
The People's Republic of China was Canada's fifth largest trading partner by mid-1996. We all recognize that the opportunity is there in the world's most populated nation as China continues to improve their living conditions.
Canadian major exports in 1995 were fertilizers, electrical machinery, equipment, cereal and wood pulp. There is also a tremendous opportunity for the wheat-growing areas of Canada, as demand in China, particularly for animal feed, is rapidly on the rise. Business Week reported that the Chinese are now rich enough to start eating more meat or beef; therefore, they will be importing a lot of animal feed.
India is also an upcoming underdeveloped market for Canadian goods. Unlike the 1970s, when Canadian wheat exports to India represented an important part of our bilateral trading relationship, today each country accounts for only about 1 per cent of the other's total exports. The Team Canada visit to India last year will also help.
Another issue is trade in services. The service sector has been traditionally overlooked, although it comprises a significant share of Canadian exports to the Asia Pacific region. A conservative estimate is that we sold $4 billion worth of services to the Asia Pacific region in 1995. One of the newest and growing sectors in which Canadian companies are experiencing success is the delivery of environmental services. This is one area where Canada can apply more. The Globe trade shows that we hold in Vancouver also help.
The banking and insurance industry of Canada are also quite well established in the southern part of the Asia Pacific region. Sun Life has been active in the Philippines for over a century; and most of the major banks, especially the Bank of Nova Scotia, are also well established in the Philippines.
Education services for Asian foreign students in Canada are also starting to be recognized as a profitable income-generating strategy. The opening of Canadian education centres throughout the Asia Pacific region is marketing our universities and colleges as centres for academic and mechanical excellence.
Finally, tourism from Asian countries is also on the rise, providing valuable foreign exchange and a source of jobs in many industries, like service and transportation.
Lastly, I wish to emphasize the economic benefits of Asian immigration to Canada. Since the late 1980s, Canada has received a large number of immigrants from the Asia Pacific Rim. This includes both investor immigrants and those arriving as family-class. An increasing proportion of Asian immigrants are coming with visas other than family-class, including business and investor categories.
In a study by Roslyn Kunin & Associates, it was found that there was a high correlation between the number of tourist and student arrivals from a certain country and the number of investor-class immigrants from that same country the following year. The government policy should, therefore, encourage tourism and students from the Asia Pacific region, in an effort to encourage long-term investment into Canada from that region.
The business immigration from the Pacific Rim represents a significant economic benefit to the Canadian economy. For the 1986 to 1990 period, a total investment of $3 billion was brought into Canada by business immigrants, the majority of whom came from Asia Pacific, as per the study by Roslyn Kunin & Associates in 1993. British Columbia is the most privileged province as a recipient of Pacific Rim immigrants for the past 10 years.
From 1986 to 1992, the Asian share of total British Columbian immigration rose to 26 per cent, rising from 37 per cent in 1986 to 63 per cent in 1992. The figures for all of Canada show the proportion of Asian immigrants as 63 per cent in 1994 and an estimated 61 per cent in 1995.
Although the investor-immigrant program has been a success in terms of stimulating the B.C. economy, the family-class immigrants from many parts of Asia also become successful entrepreneurs, leading to job creation and capital investment. The sectors which benefit most from immigrant entrepreneurs are services, wholesale and retail trade, and manufacturing.
An issue of concern for the Canadian economy in general, and that of British Columbia in particular, given the close relationship with the Pacific Rim, is the economic downturn of the past few years in Japan and the tiger economies of South Korea, Hong Kong, Taiwan and several parts of Southeast Asia. These economies used to provide annual GDP growth rates in the double digits, particularly until the late 1980s and early 1990s. The figures are starting to come down; a lot of them are only one digit. Although many would like to refer to this as the normal cycles of economic growth, others have become alarmed at the very likely prospect that these countries have overheated and are stretching to their infrastructural and environmental limits. A sustainable program of development throughout the Asia Pacific region, including North America, should be considered of strategic economic importance for future policy and planning.
Senator Grafstein: I think your presentation vis-à-vis entering into Asia is exciting and dynamic. I only wish that the Toronto Stock Exchange could be as aggressive as you are in diversifying its sources of capital.
Can you give us some insight as to how the VSE at this moment obtains investment? One of the issues that is in front of us is the deterioration of Asian investment in Canada. It strikes me that the VSE is a perfect vehicle for enticing direct investment into Canadian enterprises or at least Canadian-centred enterprises. Can you tell me what percentage of your shareholdings on the VSE would be outside of Canada? How successful has the VSE been in attracting foreign investment into the VSE?
Mr. Johnson: As a rough guess, it is a mix. There is a lot of money from the United States and from Europe. It wanes with the confidence in the Canadian economy. This past year, the mining industry has caused unprecedented jumps in the market. Money has come in from Asia and will continue. What we are attempting to set up now with VISTA trading, for instance, will bring a whole following of investors from Asia to invest in those companies. We intend eventually to give them full trading access to the whole board of stocks. In companies in Taiwan, the investor is a more active participant and trader in the market than what is seen in North America. If you go into their exchange or into their broker offices, you will see that level of activity. Somebody will come in, and it could be the daughter of the family, and will have a tout sheet for all the members of the family. This person can look at a screen, where he or she can look up the information on a company. They have a very complex list of company databases today, far in advance of the North American ones, because a few years ago they started from a blank piece of paper and leapfrogged everything. The trading activity is there.
The challenge to us was to get it set up, get the technical kinks out of it. We now have some of the foreign brokers starting to step in and bring their clients with them. That will bring more companies to list on the exchange and start to take advantage of the market.
Senator Grafstein: Do you have a sense in the last three years about the growth of foreign investment in the VSE in VSE-listed companies; and if so, what percentage it would be from whatever source?
Mr. Johnson: I would be guessing that the foreign mixes may have shifted up by another 10 per cent. It may be been 20 per cent; it may now be up around 30. However, that is nothing more than an educated guess on my part.
Senator Grafstein: It is moving up?
Mr. Johnson: It is moving up.
Senator Grafstein: Returning to your comments on the major barrier for listings for foreign-based companies that want to list here or to seek capital here, is it essentially tax structure or disclosure? I am talking about the disclosure of $100,000.
Mr. Johnson: Those two things are in the way. I am referring to what I know anecdotally from a number of businessmen who are talking about investing here, not coming on to the exchange.
In terms of coming on to the exchange, the ownership is typically in Hong Kong or Taiwan. We prefer it that way, because they are more conversant with the policies and the procedures of doing business in North America. That is an important thing for them to understand, because you have to reconcile the differences in our securities laws versus theirs.
Today, with computerization, the world makes it possible to enter into an memorandum of understanding with the stock exchange in a country we want to do business with. We also encourage that between the two securities commissions. There is then a basis for sharing information about clients and people, so that you get to know who you are dealing with. That is critical to making it work. The impediment there is more them going through the learning curve of meeting the standards that are applicable in our market.
Senator Grafstein: Disclosure standards?
Mr. Johnson: Yes.
Senator Grafstein: When I was in China, I watched the whole rudimentary attempt at establishing a type of securities exchange. The Chinese have moved in that direction; it is there. When I say "rudimentary", I mean in the sense that the amount of information that is available is minimal compared to what is required of the VSE. Are they making progress along those lines?
Mr. Johnson: Yes, they are.
Senator Grafstein: Do you see the Chinese market establishing the same kind of exchange that, as I understand it, you tried and it did not work. Do you see that situation changing?
Mr. Johnson: I am not sure they are ready yet. I was in Hong Kong in November at an annual meeting of a world-wide association of stock exchanges, called the FIBB. They took the whole conference into Beijing. We talked to all of the stock exchanges in China and talked to the different areas within the exchange about that. They have made tremendous strides in the last three years in terms of trying to come up to world standards. The discussion involved encouraging them to join this association that we are all part of, where there is more of a standard of the level of operating. They are actively trying to learn and understand the markets and build the market.
I spent three years in Australia in my former career and had the opportunity to travel into Asia a little bit a that time, both as a tourist and also doing some of what we called the banking runs, building banking relationships and raising capital. I have always been impressed by the amount of industry and activity in those countries. My feeling is that North Americans, in particular, do not realize the vibrancy of those economies today, the level of productivity, the work ethic and the industry of the people. That is what we are competing with and we need to start to recognize that.
I referred specifically to the fact that we are a niche player, something which has been very clearly for ourselves in the last year. In order to be effective competing in the global markets, one has to think that way, including our major institutions in this country.
When you do strategy work and competitive analysis, if you are looking at it from wanting to be a dominant, a major player, your whole viewpoint on how you attack the situation is different. This is probably inappropriate, if we want to effectively compete in the future.
Senator Grafstein: Mr. Johnson, I want to commend you. I think you are doing terrific pioneer work on this crucial issue. This has been an excellent presentation.
Senator Perrault: Mr. Chairman, it has been a good presentation. A question arises. A few years ago, the VSE was subject to a great deal of criticism here in Canada and abroad for alleged less-than-meticulous operating standards. What is the situation today and what has been done to re-establish investor confidence?
Mr. Johnson: A few years ago there was the Makin Commission. You were dealing at that time with a very dated situation, where many of the things that had to be put in place to control this market had not been built. One of the breakthroughs was an automated trading system, where the trading had to be very open and transparent. A trader looking in can see all of the bids and asks, hit the button and have their trade executed. Prior to that, it depended on who your broker was and the trader he had on the floor. I have talked to people, particularly in the institutional funds, where they have related to me stories of pricing that was all around the price they were looking for but their order did not get filled, which meant that their broker was not sharp enough. That is the first step.
It also makes it possible to apply surveillance tools, where the market can be monitored more effectively in terms of trading patterns, thus enabling the early detection of problems. I am relatively new to the exchange; I have been there 16 months.
Senator Perrault: You are satisfied with the standards that have been established?
Mr. Johnson: We have been putting in some changes. I have put in much more rigorous enforcement. It is not a question so much of controlling the quality of what comes onto the exchange. You apply your standards, but you get your service levels up. If it is good business, it should be put up; if it is bad business, you reject it.
What we were dealing with in terms of our earlier reputation was market practices and abuses that needed to be deterred and eradicated from the exchange, which is done by enforcement and aggressiveness. The problem has to be detected; you must be firm and resolute. You will find that we are not getting as much publicity today -- we are doing the job.
Senator Perrault: That is very true. You have gone some way to restore confidence again.
Mr. Johnson: We have to continue with that. It is a never-ending vigil and we have to be smart at what we do to continue to develop the tools. Today we have an automated trading system, which is a real breakthrough. We were the first in North America. We are the only exchange that has a fully automated trading system that works, whereby we started to get on top of the market and gain control. The rest is taking advantage of developing the other tools, having the will to enforce and creating the right attitude among the member firms that we want good quality business.
Our members on the corporate finance side are required to sponsor a deal now for one year to have a separate corporate finance department and they have an underwriting licence with the Commission that is at risk if they do not do the job. That automatically raises the quality of the game, because they understand that that is a serious structure. The VSE has come a long way, but the job is not done.
Senator Perrault: Do you have a presence on the web?
Mr. Johnson: Yes, we do. We were the first exchange with a website in Canada.
Senator Perrault: How has that worked out?
Mr. Johnson: That has worked out pretty well. We are currently looking at our management information, to be able to make more information on our listed companies available on a one-of basis; also, we provide that information through the information disseminators.
Senator Perrault: Do you see the time when there will be some in-home activity by individual investors, as is being done by the on-line banks?
Mr. Johnson: I can see the vision today. I told you about the young lady in Taiwan who had her tout sheet for the family and had about four different things to check out. She got her information off the screen and went to another terminal and executed the trades herself. The only thing that was missing was that she did not have her Visa card or account card so she could take the credit. It will not be long before we are able to do that from home.
Senator Perrault: It is down the line, perhaps.
Mr. Johnson: The technology is almost there to make it possible. Now we have to figure out how to do it and how to charge for the services.
Senator Perrault: And security.
Mr. Johnson: And security.
Senator Andreychuk: If you could expand on the comment you made about the fact that you like the transactions through Hong Kong for China or Taiwan. Leaving Taiwan aside, for Hong Kong can you elaborate on why you believe that that is advantageous and whether there will be a change. Are you contemplating one when July 1st arrives?
Mr. Johnson: I do not see a significant change in that for some time. The issue for us is looking at the other side. For the participant who wants to come into the market, we are interested in how much they understand of the North American way of doing business, the standards that we would apply and the securities regulations in listing a company and conducting trading; the disseminations and the continuous disclosure requirements that follow once a company is listed. Today businessmen from Hong Kong are quite familiar with the North American way of doing business. That makes it much easier because they understand the culture in reverse. We need to understand the culture going the other way. Also, businessmen from Hong Kong are better able to do the business with a Chinese partner in Mainland China. I doubt that we will be able to develop that expertise for a number of years. It will happen, but it is not going to happen because of 1997. It will happen sometime down the road. They are studying very actively. My sense from this meeting is that the exchanges will work closer together after 1997.
As China further opens up to the world, which I see happening, they are also getting much more accustomed to the western way of doing business. You see it in development. It had been five years since I had been in Beijing; I could not believe the changes that had taken place and how much was coming in there in everything that they do in terms of the walks of life. As that continues, the opportunity to deal on a more direct basis will present itself. Right now, I like the idea of the buffer.
Senator Andreychuk: You also indicated that some investors are accustomed to other exchanges. You used Indonesia as an example. There was the question of the amount of disclosure you have to do in Canada and that that may be a disincentive. Are you advocating any change in the way you do business and the way Canada should do business on its exchanges?
Mr. Johnson: That is not applicable to the exchanges. It relates more generally to the issue of business people coming over here and investing in Canadian businesses. They are looking at the tax structure and what they have to declare. In terms of companies coming on, the fact that they have to start to disclose is an impediment because they typically will end up trying to establish a company offshore, and they still do it. You end up with a structure that is artificial.
Senator Andreychuk: Are you advocating any changes?
Mr. Johnson: You should be addressing it, making it a more friendly, easier process -- streamline it and make it more efficient. We have an opportunity because nowhere else in the world is venture capital there. In Australia, the problem, when they merged their exchanges, was that they also merged the Commissions. They raised the bar for venture capital by putting in an earnings test. Ninety per cent of the venture companies do not have an earnings track record to show, so they do not qualify any more.
We have the same problem in small business lending in Canada -- the bar is set too high and most of the ones that you want to lend to do not qualify. That is why we have seen the influx of Australian companies on to our exchange. We must be cognizant of that. We should do everything possible to make it friendlier and more efficient for a company to come here. We are the first port of call. We can start their project off, in terms of venture capital. As they are more successful, they have a number of choices. They can choose to proceed deeper into the North American markets and interlist on the TSE and on their home jurisdiction.
For the Canadian markets, there is an opportunity here to continue this relationship, which could happen quite easily. The opportunity for us is in global competition. If the Toronto Stock Exchange competes with New York for a listing in South America, where do you think the listing will go? It will go to the United States. One the other hand, if we bring them in to Canada through the VSE in the first place, there is an opportunity to continue the migration up through the Canadian markets, because we can be more efficient and user-friendly. I see us as having a competitive edge in terms of the Canadian financial markets.
The Chairman: You made two or three comments about how stock exchanges operate in Canada and the improvements. Have you had an opportunity to put these before the Department of Finance in Ottawa?
Mr. Johnson: Yes. We have had informal discussions at policy levels. We had meetings last November with Paul Martin and John Manley when they were out here.
The Chairman: Are you hopeful?
Mr. Johnson: Yes. I sense a willingness to listen. If anything, we have increased the awareness level of the VSE and what it does that was not appreciated before.
The Chairman: Is the problem primarily federal, or is it provincial? Or is some of it federal and some provincial?
Mr. Johnson: The tax structure is federal.
The Chairman: What about this matter of a company having to register with different exchanges?
Mr. Johnson: That is an issue of registration between the commissions. For the initial stage, national commission or not, if Alberta and British Columbia -- which is where all the junior capital is done, basically -- are operating with a similar set of rules, then getting efficiency between those two can happen immediately.
My membership is comprised of both national member firms and local firms. In terms of the players in our market, the national firms provide about 35 per cent of our trading and none of our listings. For the regional players that are in Vancouver, I am getting 50 to 60 per cent of the trading, plus all of the listings activity. It follows that the national firms would like to see a national commission. The local firms are very concerned. It is not a regional issue at all; it is one of understanding that the markets are quite different, junior capital and senior capital.
When I look at the current offerings in terms of how to structure a national securities commission, the fundamental problem that it comes down to is that you have to give comfort that the junior capital market will be preserved and not impinged by the changes that might be imposed. What is missing today is the policy formulation for the rules that apply to the junior markets. Under what is proposed, they will only be provided the ability to provide input. There is no assurance that you will not be dominated by a structure that is dominated by the senior markets. All you have to do is look at Australia to see how to get it wrong. The concern is very valid.
Senator Bacon: Mr. Gaw, you mentioned the newest and growing sectors in which Canadian companies are experiencing success, such as delivery of environmental services, and it is rapidly growing in Asia. We know that the APEC members, with their phenomenal growth rate and population of more than one billion, face two major challenges: global warming and the deterioration of the quality of air.
Could Canadian investors include environmental conditions in the contracts they sign? If so, what would be the possible consequences if this were requested?
Mr. Gaw: For those of you who have not been to China, the air quality is very polluted. Coal is mainly used to heat homes in the wintertime. The rivers are very polluted. If the Canadian government can finance some of the operations, China could use a lot of help in this area. Canada is very well known in environmental engineering and clean-up.
Senator Bacon: If Canadian investors were to invest in China and requested some special norms in environmental issues that they would discuss with their counterparts, what would be the consequences? Would that be acceptable to the Chinese people?
Mr. Gaw: It would be acceptable, but the government might not have the money to do it.
The Chairman: While you are answering questions, Mr. Gaw, I have one. You referred in your statement to the downturn of the past few years in Japan, and in the tigers.
Mr. Gaw: The economy is down substantially.
The Chairman: What is your view? Is this simply cyclical, or is the Asian growth miracle coming to a conclusion?
Mr. Gaw: I believe it is cyclical. The United States went through that in the S&L situation, and it took them many years to correct. Japan overheated in real estate. It needs the time to correct it. Japan is doing it slowly and it seems they are starting to overcome it.
The Chairman: If one looks at the history of industrialization in Europe, England, for example, it started off with a relatively small population; the population growth took place in step with industrialization. The situation we looked at in certain Asian countries was quite different. Some may say that there is already a capacity population. What will be the impact on the population pressures in the great cities of industrialization as people are drawn in to urban employment? What will be the impact of modern medicine? Quite aside from the economic question, is there a societal question which we ought to be worrying about?
Mr. Gaw: I am very familiar with Thailand; I stayed there for 10 years. Thailand's economy used to be 80 per cent farming-based, until the mid-1970s when it started to take off. Japan became the biggest investor there because labour costs were very cheap. From 1977 to 1985, the economy shot up. There was an average of 13 to 15-per-cent GDP improvement every year. As a result, the standard of living and income of the people kept doubling in a very short time. The medical facilities were improved. They imported a number of brain-scan machines into Thailand.
The Chairman: What will be the impact of the concentration of population in urban centres? Will those cities be viable? Will it be possible for people to live there?
Mr. Gaw: The impact in Bangkok is becoming worse and worse. The traffic jams are terrible.
The Chairman: The city is sinking, is it not?
Mr. Gaw: The city is sinking because of geography; Bangkok is like Richmond. Furthermore, because the government was not supplying enough water to the population, half of the population was drawing water from underground. As the underground water depleted, the land started sinking. There are many flooding problems in the rainy season because of that. They are trying to overcome the public transportation system. A Canadian company was involved in the public transportation area, but things changed and they did not build a rapid transit system. They have been trying to improve; it is a continuous problem.
That is not only seen in Bangkok. China did not have an automobile and traffic jam problem and now it is starting to have those problems.
The Chairman: Is there urban sprawl in Shanghai?
Mr. Gaw: Yes.
The Chairman: It is what is known as the "Toronto syndrome", where it spreads out and occupies all of the good arable land.
Mr. Gaw: I have never been to Shanghai. Your question is whether all these economic booms are good for the big city?
The Chairman: Whether society can survive the urban growth that will take place with industrialization.
Mr. Gaw: In the Bangkok situation, the government is encouraging industry to move out. The government is giving benefits such as cheaper land, lower minimum wages and some other help to encourage industry to move out. Otherwise, farmers and others like go to the city to find jobs.
Senator Stollery: Mr. Chairman, I found the testimony today generally interesting, particularly Mr. Blewett's recounting this morning of what it is like to do business in China. This leads to a question to Mr. Johnson. I thought it was extremely interesting dealing with private funds, people not wanting to divulge or disclose how much money they have or comply with what we think of as normal standards in financial accountability. The other way we describe that is fiduciary responsibility. We know that there is no independent judiciary in China. There probably is not one in Thailand either and that is one of the reasons for their problems.
Having listened to our witnesses this morning, it appears that there is no independent judiciary, a probable disappearance of the independent judiciary in Hong, and no access to a court. We talk about the stock market. If there is a criticism of the Canadian stock exchanges generally, it is that their standards of fiduciary responsibility are much lower than the Americans. Some of the mutual fund scandals might not have happened in the United States.
Mr. Johnson: They have had their share of problems.
Senator Stollery: How are they going to establish a market where large amounts of capital can be raised, with a penchant for not wanting to talk about capital, about their money? They do not want to issue certified financial statements and all of the usual things that are required when asking someone to invest money in a proposition.
Mr. Johnson: There is a level of reasonable standards and disclosure. However, with things like financial statements, they will obviously have to move closer to our standards if they want to participate in our markets. Overall, their system has worked. The Chinese understand capitalism quite well. They can make it work and I have every confidence that they will be able to bring it forward. They will adjust to our standards somewhat, but there are other things involved. Also, with our system comes a 56-per-cent marginal tax rate. That is something that they find abhorrent.
Senator Stollery: In the Standard & Poors 500 monthly stock guide there may be Chinese companies listed, but I doubt if there are very many.
Mr. Johnson: I doubt it at this stage.
Senator Stollery: How do you see this working? Will this cause pressure for an independent judiciary? In Mexico, shootings are taking place; there are many problems because of no independent judiciary. Ten years from now when Chinese firms have to raise capital on the world capital markets, how will they do that?
Mr. Johnson: You will find they will be much closer to the universal standard.
Senator Stollery: Who is going to enforce it?
Mr. Johnson: It is not a case of enforcing it; it is first of all agreeing on it and then mutually enforcing it in your own jurisdiction and sharing the information among one another.
I described earlier that on my last trip to China I saw that they had made tremendous movement, according to the other stock exchanges around the world, over the last three years. That will continue to set up the infrastructure that is necessary to support a securities industry in China. If they are enticed to join and become part of the world organization, it can only be a positive step, the result of which will be an opportunity to share ideas, talk about problems, build up an appropriate infrastructure and come to more universal standards.
If you go around the world today and talk about standards of disclosure or corporate governance, the big issue in North America is almost a non-issue in Europe and even less of an issue in Asia today. You have to look at the history of those markets to understand why. Basically you have large family investment holdings in both of those areas. Corporate governance is not the issue in terms of running an enterprise. It is a very important issue in running businesses in North America.
Senator Stollery: In borrowing money?
Mr. Johnson: Let us focus on what I am saying. Let us define the disease first and then apply the appropriate cure. Let us not put the bandage on because that is what we have as the cure.
Mr. Gaw: I do not know, senator, whether or not you are familiar with the Hong Kong stock exchange. It is well-regulated and China has promised to continue. There are quite a few Chinese companies listed in Hong Kong. They have to follow the Hong Kong stock exchange conditions and their accounts are audited.
Mr. Johnson: Their listing requirements are higher than the Toronto and New York stock exchanges.
The Chairman: I wish to thank both Mr. Gaw and Mr. Johnson for their interesting submissions, complicated in some cases, but fascinating.
Our final witness for the day is Mr. Ian Ogilvie.
Ian Ogilvie, President, Canada Pacific Russia Trade Centre: Mr. Chairman, honourable senators, I would like to take this opportunity to make a plea for Canadian diplomatic representation in a part of the Asia Pacific region which is somewhat ignored today, bearing in mind that over half of Russia is in Asia. The association which I represent is a British Columbian not-for-profit association, recently renamed the Canada Pacific Russia Trade Centre, formerly the Vancouver Vladivostok Trade Association.
Our members feel very strongly that it is difficult to compete with the Americans in that part of the world. The Americans have had a Consulate General in Vladivostok since 1991. The business, especially in the food area, is concentrated on the Seattle, Khabarovsk, Vladivostok access. If a Canadian business person wishes to invite someone from Pacific Russia to visit Canada, that person has to make application to the embassy in Moscow, seven time zones and 11,000 kilometres away, further away than we are from Dublin or Paris.
I have been told, although I find this very hard to believe, that the embassy requires that they send their passport. If I apply for a visa from the Russian embassy in Ottawa, I have to send a photocopy of the first two pages. Imagine the disadvantages for senior Russian business people having to be without their passports for 10 or more days. Even if that Russian business person receives a Canadian visa, he or she might be asked to go to Moscow for an interview. They also have to get a U.S. visa in order to transit Anchorage or Seattle.
Getting here is also a problem. Because there are no consulates, they have to get on an American plane and fly to Seattle. There are many horror stories. Recently, the number three person in Russia's largest shipping company, the Far East Shipping Company, was in Seattle and wanted to visit his Vancouver office. He was under the impression that all he had to do was to go to the consulate and get a visa. That did not happen. He did not get a visa because they told him it would be five days before he could get one.
One of our members learned that one of the Russian trading forestry companies was in the market for skidders. They were in Seattle. He wanted them to come here and visit Western Star. That was not possible, as there was no possibility of getting a visa.
Let me give a few background details of the trade association. In 1991-1992, there was something called the British Columbia Primorye Trade Initiative. All of the prominent firms took part in that initiative, at the invitation of the then-governor of Primorye. Some of those representatives will be presenting tomorrow. Primorye is the province of which Vladivostok is the capital.
Jill Bodkin, a prominent businesswoman here, put together this mission. Over the course of two years, they tried to get something going over there, but they were a bit too early. The ideas that they brought with them were just too early for these Russians; nothing came of it.
One of the first business people from Canada to visit Vladivostok was a Canadian entrepreneur by the name of Ted Pickel from Fort St. John. In 1989 or 1990 when Vladivostok was opened up, he floated a motel over there. It is still the best motel in town. He will tell you that for every one Canadian who is registered there, there are 50 Americans. It is very difficult to compete, because without the visa there is not the traffic; and without the traffic there is not the bank support of the airlines. That is it in a nutshell.
Local business people here feel that because there is not diplomatic representation and support, if the country is not supporting them in some way or another -- they use that as an excuse. It is a valid excuse and the Russians also say that. It is very unfortunate, because relationships between Canadians and Russians are totally free of any baggage such as the Cold War. Russians have a natural and comfortable relationship with Canadians. They may have to do business with the Germans, the Japanese and the Americans, where there is always some psychological baggage.
On September 20 last year, I passed a message from the Russian Minister of Foreign Affairs, Mr. Primakov, to Mr. Axworthy a few days before they were supposed to meet in New York at the time of the opening of the General Assembly, which said that if Canada were interested in opening a consulate in Pacific Russia, then Russia was interested in opening a consulate here in Vancouver. I do not know if they ever met. The answer from the senior officials was that there was no money. However, $30 million was found to keep Radio Canada International alive for a year.
There is a group of retired Canadian executives here, Serex or Irex, several with marketing, language and other backgrounds, who would be quite happy to go there and spend six months in a temporary embassy on a rotating basis with no compensation other than expenses.
Compared to the Americans, we are fighting with both hands tied behind our backs. Since the opening of the Consulate General, the Americans have a Gore-Chernomyrdin Commission, which meets twice a year and is very supportive. They also have a network of business offices in Sakhalin, Havas, and Kamchatka. I do not think we can afford that at the moment. At least we should be able to afford some kind of consulate there, which would send signals of support.
Senator Grafstein: Can you give us some economic parameters of two-way trade that could be involved between Vladivostok and Canada. We are familiar with Russia facing west, but we are not familiar with Russia facing east. I have heard terrible tales of Vladivostok. They are all anecdotal. There are difficulties there, problems with shipping and the difficulty of dealing with shipping there. I blotted it out of my mind and have not focused on it, but now that you are here can you give us some insight into that? There are real problems in the shipping area, regulatory controls and slippage.
For the Department of External Affairs to set up a consularship, even on a part-time basis, is a major investment as they perceive it. They have to show cost-benefit analyses. What is the cost benefit that we can advise the department to do that would support your recommendation?
Mr. Ogilvie: It is tantamount to business starting; whether you are investing in machine tools or computers, you have convinced yourself that there is an economic potential there. Everyone knows that that part of Russia is the richest part, with gold, diamonds, fish, wood, even coal. One wonders, looking at Teck and Fording here, which have major metallurgical markets in Korea and Japan, why they are not courting these companies, which are now privately held stock companies with which one can talk about shares rather than money. Why are they not getting to know some of these metallurgical coal companies in Yakutia and Khabarovsk provinces?
They are beginning to enter the Korean, Japanese and other markets. They are much closer to those markets than we are. I put out a weekly newsletter and I am beginning to show them that companies in that part of the world are already in Korea now starting to construct wood houses and setting up plants to make door frames -- stock in trade for this part of the world.
We had a unique visit last September. Six heads of the major Russian forestry combines for Pacific Russia were here for seven days, a captive audience. Never, even in the United States, have six of them appeared like that. They were sending signals that they wanted to get out from underneath the Japanese yoke. The problem over there is working capital. They desperately need working capital because the railways and the ports will not give them credit any longer. The Japanese are the only ones who will give them money up front for the cut. They have their terms: They dictate the prices and you have to take their machinery.
These six individuals were here for a week, and we spent a lot of time going around the country. Our business people, the most senior ones in the area, listened, but their attitudes were already set because they had read from that that part of the world was doom and gloom. As well, they say that they are not getting any particular support. Furthermore, business people, rather than taking the lead and inviting the government and the banks to follow, tend to wait until the government embarks on a trade mission, and then follows.
Senator Stollery: I find it very interesting because I am currently considering going to Vladivostok to look at precisely this. I have been in the Soviet Far East. That was the old maritime province. When I was in Ulan Ude years ago, in the famous places where Canadian troops were in 1918, I noticed the enormous freight traffic from Japan to Europe using that railway. It is one of the most amazing things I have seen. I have never seen so many 120-car trains along a railroad. At that time, Vladivostok was closed. It had been closed for many years, since the 1920s when all those consuls closed, because they all had consuls before that.
I assumed from the enormous traffic and from the use the Japanese made of that line, because there are no roads across Russia, just an enormous steel railway, that they must have tremendous port facilities in Vladivostok. What is the state of affairs? How do they handle that?
Mr. Ogilvie: There are a group of ports, Nakhodka, Vladivostok and Vostchnyy. Those ports together handle 40 per cent of all the foreign trade of Russia. They are the only totally ice-free ports, so they are open 12 months of the year. Major expansion projects are being bruited at the moment there. Members of the committee should pay close attention to what the new Russian Prime Minister, Mr. Primakov, is about. He is a seasoned, old type, who has recently been involved in charm missions in that part of the world. It is quite clear to him that Russia is going to have to look very much into the Asia Pacific area and they are lobbying Canada and others to become members of that APEC at the moment. It is vital for them.
Senator Stollery: The Japanese, despite the disputes over the Kurile Islands and despite the long dispute over Sakhalink, and despite the fact that they do not recognize each other -- is there even a peace treaty -- have been using, to a huge extent, that railway system through Vladivostok.
Mr. Ogilvie: Not only the Japanese.
Senator Stollery: I noticed on the railway cars that it was 80 per cent Japanese cars, heading for Europe. There were hundreds of containers; one cannot imagine how many trains, with those wide bogies, because they have extra wide bogies on the Russian railway.
Mr. Ogilvie: It is true, but the railway still has lots of problems. It is a monopoly and it has taken advantage of its new freedom in the last couple of years. From 1992 through 1994, freight rates went up by 2,000 per cent. The result is that Pacific Russia, which in fact was a colony that sending all of its raw materials to the Motherland, for which they received manufactured products back again, has changed. Pacific Russia can no longer afford to bring anything from European Russia. All the cars are Japanese. The food is from Australia and New Zealand. They have Washington State apples. Washington State has a representative there. According to the last statistics, 97 per cent of the food in that area is imported from Asia Pacific. It does not make any sense to bring anything overland. To find a Lada or a Russian car is very difficult.
The Chairman: We thank you very much for appearing before the committee.
The committee adjourned.