Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

Issue 5 - Evidence - Meeting of February 6, 2014


OTTAWA, Thursday, February 6, 2014

The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:35 a.m. to study security conditions and economic developments in the Asia-Pacific region, the implications for Canadian policy and interests in the region, and other related matters.

Senator A. Raynell Andreychuk (Chair) in the chair.

[English]

The Chair: The Senate Standing Committee on Foreign Affairs and International Trade is studying the security conditions and economic developments in the Asia-Pacific region, the implications for Canadian policy and interests in the region and other related matters.

We have before us this morning Mr. Patrick McGuinness, President of the Fisheries Council of Canada; and by video conference we have Peter A. Petri, Carl J. Shapiro Professor of International Finance, Brandeis University.

I trust the video conferencing technical issues are solved and you can hear us, professor?

Peter A. Petri, Carl J. Shapiro Professor of International Finance, Brandeis University, as an individual: Yes, thank you.

The Chair: Our committee generally accepts opening statements from our witnesses and then we like to go to a question and answer period. I understand it has been agreed, Professor Petri, that you will go first, followed then by Mr. McGuinness. We will then go to questions and answers. Welcome to the committee.

Mr. Petri: Thank you very much for inviting me. Ever since my PhD thesis in the 1970s, I have had a very fortunate career, having a ringside view of the astonishing progress that Asia has made. I worked in virtually all of the countries in the region and have often participated in the trade and development policies as they unfolded.

At this point, colleagues and I have a large project on the major trade initiatives in the region, the Trans-Pacific Partnership, which includes Canada as well as the United States; and the Regional Comprehensive Economic Partnership, a 16-country negotiation consisting of Asian economies.

These are critical building blocks of what I hope will become solid trans-Pacific policy architecture in the region. Much of our results are on our website, which is called asiapacifictrade.org. I'm sure our discussions will address the details of these issues later.

I would like to start not with today's events — not with slowing Chinese growth, the "three arrows'' of Abenomics, tensions on the seas — but, rather, with fundamentals. We know that one half of the world's population is now in the mainstream of economic progress. No one worries anymore, as people did when I began my studies, about jump- starting development in Asia. Asian economies have doubled their output regularly every 15 years or so and some countries have done much better.

Asia's income relative to ours is rising at a rate that doubles it in every generation. The gap is still large enough so that continued progress is highly likely.

It doesn't depend on particular leaders or particular policy directions. It is really driven by billions of very energetic, entrepreneurial, talented and well-educated people. It is not ephemeral.

By 2030, we estimate that Asia will account for about half of world investment. Its middle class will expand by about 2 billion people, becoming much larger than that of North America and Europe combined. In turn, Asia's emissions of greenhouse gases will mostly determine the fate of our planet's climate.

In another generation or so, Asia will appear at least twice as large on our policy horizon as it does now in trade, investments, security, environment and all areas of economic and security policy, and yet Asia still often winds up on the back burner of policy today. President Clinton intensified U.S. engagement with Asia through APEC, but over the next two decades, the focus of U.S. policy shifted back to the Middle East.

The Obama Administration began by advocating a pivot to Asia, but the president has since cancelled several trips there. The Trans-Pacific Partnership, the centrepiece of his economic engagement in Asia, now faces widespread attacks within his own party in the U.S. Congress. Meanwhile, concerns about the reliability of the United States are becoming pervasive and, I think, contribute to rising tensions in the region.

The United States needs to refocus its attention on Asia and keep it there. Good foundations are plentiful, deep business and social ties, massive flows of students, migrants, tourists, reasonably compatible views of economic policy and advanced initiatives like the Trans-Pacific Partnership. China and Japan have reformist leaders, and so do many other countries.

ASEAN, the 10 Southeast Asian economies, are running the world's most ambitious regional experiment today. Most Asian countries are democracies, and even those that aren't pay a lot of attention to the well-being of their citizens.

Between 1990 and 2010, Asia cut the incidence of extreme poverty by more than a half and is on track to eradicating extreme poverty altogether in another 15 years.

The glass isn't full of course. There are trouble spots ranging from North Korea now to Thailand, and the uncertainties generated by China's military rise. All that is even more reason for us to keep our eyes on the ball.

Canada, you need to help us do this. As our most important trade partner, Canada is integral to building a vibrant Asia-Pacific economy. Canada's direct ties with Asia are strong, as I learned again at last year's Pacific Economic Cooperation Council forum in Vancouver. It was an energetic and really inspiring event.

Canada has leverage to deepen North American presence in Asia and to help bring the TPP to conclusion. Canada's own efforts to conclude free trade agreements with Korea, Japan and even China would provide welcome stimulus for our joint initiatives.

Our ties with Asia are, fortunately, still strong, but there is urgent work ahead. We need to sign and pass the TPP. We need to engage China in the next stage of the TPP. We need to give Asia's emerging economies a greater role in global policy and in the IMF. More generally, we need to find cooperative solutions to the great challenges of the 21st century. These are plentiful and shared with our Asian partners: innovation, intellectual property, cybersecurity, macroeconomic and financial stability, the environment and widening income gaps. Most importantly, we need to overcome the shadows that history still casts over the region's security.

This is a daunting agenda and, frankly, cohesive functional politics on our side will be a critical requirement for progress.

Thank you very much. I look forward to discussing these issues in more detail later.

The Chair: Thank you, professor.

We will now turn to Mr. McGuinness. Welcome.

Patrick McGuiness, President, Fisheries Council of Canada: Thank you very much. I will start with a short description of the Fisheries Council of Canada and then our industry.

The Fisheries Council of Canada is a national association going from British Columbia to Nunavut. We focus on the wild fishery. We are a $6 billion industry, and we employ about 83,000 people.

The members of the Fisheries Council of Canada produce most of that production in exports. We have significant harvesting activity, particularly in British Columbia, where most of the vessels are members of our BC Seafood Alliance. In Atlantic Canada, we predominate in shrimp, groundfish, scallops and herring.

The main players in our council are basically what we call integrated companies. These are companies that own their vessels, have their own processing facilities and participate in terms of the export and marketing of their products.

The fishing industry of Canada is an export industry. Sixty per cent of what we produce, we export, and of those exports, 60 per cent go to the United States. Obviously, we're relatively dependent on the United States, but if you look across Canada's industrial sectors, you will find that in terms of their exports, about 70 to 75 per cent go to the United States.

In our case, we have been focusing on diversification. We're down to 60 per cent dependence on the United States, but we have a way to go.

In terms of our diversification strategy, we did focus quite a bit on the Asia-Pacific. There a couple reasons for that, I would say, internally. The European Union wasn't that strong of an attraction, notwithstanding that it is the largest seafood market in the world. The problem we had is that they have high tariffs, anywhere from 7, 15 to 20 per cent, and our competitors, the Scandinavian countries, basically get in there at 0 per cent. Also, the arrangement the European Union has with developing countries, their products get in there roughly at about 0 per cent.

Another reason, I guess internally, is in terms of British Columbia. In British Columbia, we harvest fairly unique type of species that are more oriented to Asia-Pacific types of palates as opposed to North Americans or Europeans, products such as geoducks, salted herring roe, sea cucumbers, sea urchins and sablefish.

Why we focused on Asia-Pacific is, one, Asia-Pacific has a very high per capita consumption of fish and seafood. In North America, Canada and the Americas, we consume maybe about 7 kilograms per capita per year. In Asia-Pacific, it is basically running from 15 kilograms to about 30 kilograms now in China.

Also, what we saw was a changing landscape in Asia-Pacific. We saw an increasing middle class pretty well spreading in most of the countries.

For example, in terms of the protein business, fish and seafood is usually more expensive than chicken and so forth. So we very much depend on basically high-end seafood restaurants. What we find in terms of any country that is increasing in its middle class, we see a movement to upscale restaurants, and upscale restaurants focus quite a bit on being able to present seafood.

At the same time, what that does for us in Canada in the sense of our high-end species such as lobsters, sockeye salmon and scallops, it gives us an opportunity to target that market there, and it has been very receptive.

The other thing that happens when you have an emerging middle class, and we have seen it in China, Russia and so on, is the fact that they are developing Western-style supermarkets, whether it is Carrefour from France, Asda or Walmart. They see that, and they move into those countries. That again is very helpful for us. We target those types of developments because what happens there is that the middle class, particularly in developing countries, is really drawn to these western-style supermarkets. It is primarily because of food safety concerns. What they want is to move out of purchasing their shrimp and whatever in the wet markets on the street and move into these western supermarkets wherein they have a sense there's food safety concerns. They're concerned about pesticides, aquaculture drug residues and so on.

It has been a number of years that we have been working on that, and it has generally been successful. I can say that in 2012, of our five top country markets, three of them are Asia-Pacific. The United States is number one; Canada is number two; China is number three at 440 million; Japan is number four at 260 million; and Hong Kong is number five at 130 million. Other important Asia-Pacific markets for us are Korea, Vietnam and Thailand.

Just looking at the growth we have had in Asia-Pacific, you look at a growth of our exports into China and Hong Kong; from 2006 to 2012, exports in each of those areas has increased 59 per cent.

So what is the way forward for us? As Dr. Petri indicated, we still see a lot of development, progress and opportunities for our Canadian seafood industry in Asia-Pacific as it continues its economic development.

There is no question that we're looking forward to the conclusion of the TPP, which, in terms of our interest, is basically Japan and Vietnam.

One area that Dr. Petri commented on is a need to re-engage Korea. Canada started trade negotiations with Korea. They floundered and basically were on the side track. The United States came in behind us, and they signed a deal. So the free trade agreement is between Korea and the United States. What is happening there is the import tariffs for American exports to Korea are ratcheting down to zero. So we are already losing markets in Korea in terms of live lobsters to our American competitors, simply on the tariff reductions.

There's no question that some sectors in Canada have a problem with a Canada-Korean free trade agreement. I understand the three American auto assemblies have a problem with that. The bottom line is the United States has the same type of issues, but they saw that Korea is the fourteenth largest economy in the world. We're number 10. They're number 14. There are long-term opportunities for Korea. Hopefully, there will be some returned interest in terms of getting free trade with Korea.

Thank you very much.

The Chair: Thank you. That is very interesting. You brought us up to date in an actual segment of the economy, the fisheries, which we didn't have before.

Senator Johnson: Mr. McGuinness, I'm very interested in the fishery globally. Can you tell me, please, how you would compare fisheries stewardship and processing practices among nations that are major exporters of fish and seafood products in that region, such as Vietnam, Thailand and China?

Mr. McGuinness: That's a very good question. The bottom line is that in terms of fish and seafood, sustainability has become a big, big issue over the last six or seven years. If you are going to be, for example, selling to retail in North America and Europe, you have to demonstrate your sustainability criteria. What you see is that fishing industries such as those in Canada, United States, Scandinavia, Europe and so forth get it. They get it. You have to do that; you have to be part of that to be part of the market.

There have been efforts to try to communicate that more directly with seafood industries in terms of developing countries and advancing countries such as Asia-Pacific. That is something that they certainly will have to continue to address.

Certainly, there's no question Japan gets it, but we need to see more progress in a number of those countries. The Marine Stewardship Council, which is a sustainability certification, non-profit organization that has basically become predominant in the seafood area with respect to sustainability, has now opened up offices in Asia-Pacific, so I think the message is going.

As you say, once you get more and more of the western-style supermarkets playing in those markets, that drives it, no question. Retailers very much drive the sustainability train.

Senator Johnson: You would then say that there are increasing concerns and care given to quality and even safety in these regions, these countries.

Mr. McGuinness: Most definitely. They see the same things we see in the sense that they see an emerging middle class of people who are very concerned about food safety.

Senator Johnson: What about overfishing, though? I don't think Japan has a stellar record there, nor do many nations in Europe. How would you assess it there now?

Mr. McGuinness: Overfishing in terms of internal waters is a function of responsible fisheries management. For example, in Canada there's significant investment in the Department of Fisheries and Oceans. Its budget right now I think is about $1 billion. That type of investment in your agency responsible for fisheries can then bring you controls with respect to regulations, surveillance at sea and so forth.

That's the problem. The problem in many of these countries is that they really haven't invested that much in their fisheries management regimes. They have to do that.

In terms of the code of conduct of responsible fisheries, there's an FAO code of conduct. A group of six international scientists looked at 56 countries around the world in terms of how well they are performing against this FAO standard. In fact, only six countries got a good mark. Most of them were failures. That study was done maybe six or seven years ago. I'm happy to report that Canada was one of the ones that passed.

Senator Johnson: I think I knew that. That was very positive.

Mr. McGuinness: The only developing country that actually got good marks was Namibia, on the east coast of Africa. Here again, Namibia is a country that came into the fisheries quite late. There was quite a bit of effort in terms of the FAO going down there, working with the country in terms of setting up its infrastructure, its fisheries department, and there were considerable investments from overseas in terms of getting that fishery going.

[Translation]

Senator Fortin-Duplessis: Mr. McGuinness, are there any other measures the Government of Canada could implement to facilitate the delivery of Canadian seafood products to Asia-Pacific?

Mr. McGuinness: Thank you for your question.

[English]

The Government of Canada has quite a bit of investment in terms of major trade shows in which we participate where they do develop a Canadian booth and work with exporters, and that's at the North American seafood exposition in Boston, and also the European Seafood Exposition in Brussels.

More recently, in the last three or four years, they have had a significant presence in the major fish and seafood show in China. These investments are made through Agriculture and Agri-Food Canada. If I looked at the investments they are making in those three shows, I think, right now, the largest amount of money is actually helping the Canadian industry in the major China show, which is basically an Asia-Pacific show but also becoming a global show. That's only right because, to a certain extent, the seafood show in North America is very much becoming a U.S. show. The bottom line is that if you're in the fish and seafood business and don't know how to export to the United States, you should be out of the business.

Of course, in terms of Europe, they've picked up the game quite a bit there. That's interesting because Europe, over the years, has gone from 13 countries to 28 countries. What we're looking at — it will be in May — is really trying to get in there and communicate, with the CETA, that these 20 and 15 per cent tariffs will go down to zero.

It's interesting that in terms of the Soviet Union, when it broke up, countries such as Poland, the Czechs and so forth basically became independent, and their fish and seafood tariffs were basically zero. We developed quite a bit of market in those countries with respect to low-cost species such as herring and mackerel. As the EU has expanded, it has brought those countries into the European Union. There's no question that they economically benefited quite substantially. Nevertheless, those countries had to adopt the EU tariff schedule. Instead of us getting to export at 0 per cent into countries such as Poland, the Czech Republic, Lithuania and so forth, when they joined the EU, we went back into 15, 20 per cent. It's a good opportunity, with CETA, of getting back into those markets of Eastern Europe. That's an important issue in terms of trying to get those communications out to those markets.

[Translation]

Senator Fortin-Duplessis: I am very concerned. I am wondering whether Canada has ways to address the overfishing of tuna by the Japanese. The media have been reporting that, over the last few months, the Japanese have been seen fishing tuna in territorial waters, thereby jeopardizing the survival of the resource. China is also fishing sharks for their fins.

Do you know what kind of measures Canada could take to prevent that? Some European countries are also fishing cod in Canadian waters, off the coast of Newfoundland. What can the Canadian government do in these cases?

[English]

Mr. McGuinness: One thing I can say in terms of tuna, for example, the canned tuna industry has come together and formed the International Seafood Sustainability Foundation, and you have big players there. For example, in terms of the Canadian industry, we have Canfisco, Clover Leaf and Bumble Bee . They now are basically coming together and forming their own organization. For canned tuna, you're looking at maybe six companies that really control the business around the world. The companies, recognizing the type of comments you're making and people perhaps going away from canned tuna because of that concern, are taking strategic and aggressive measures with respect to overfishing. They've come together as a group and said, "If in fact it's determined that vessel A or fishing company B is overfishing, not playing by the rules, we agree that we won't buy those products.'' That's probably more direct in terms of trying to address this issue business to business with respect to getting results.

In terms of overfishing on the high seas, you have the Law of the Sea and the United Nations Fish Stocks Agreement. Those are the parameters under which Canada has to operate. Generally, as a country, you make complaints with respect to something that's impacting your own species.

We have albacore tuna on our West Coast that is in good shape. It's being basically harvested for sushi restaurants and so forth, and then we have a tuna that comes up on the East Coast, basically transboundary. They're coming up from the southern areas, through the United States and up through Canada, and they're harvested in P.E.I. and then go directly to the wholesale markets in Japan.

Off of Atlantic Canada, since 1992, the amount of overfishing has declined quite considerably. It may be just that the amount of the resource has itself declined. It would be interesting, if we do get a resurgence of Atlantic cod, whether the relatively good record we see now maintains itself.

Senator Downe: Dr. Petri, you mentioned in your presentation the Trans-Pacific Partnership trade deal and the importance of that deal. Do you have any concern that Harry Reid, the U.S. Senate Majority Leader, announced a few days ago that he's refusing to fast-track this deal in the American Senate for the President.

Mr. Petri: Yes, I am concerned. As you know, the fast-track legislation would make it possible for the negotiators for the president's team to come up with an agreement, which Congress, in its full constitutional rights, would then have the ability to examine and to vote on but not to take apart or redo the very carefully crafted details of such a complicated agreement. Fast-track is important in finishing the deal, and it's very close. Our negotiating partners — and I'm sure Canada is among them — have told us that, in order to make the difficult decisions that they have to make, they need to have the confidence that fast-track legislation is in place.

Whether this is the end of fast-track during the present pre-election Congress, we don't know yet. As you know, this tends to be a bipartisan piece of legislation, and there's strong Republican support for it, as well as support among some members of the president's party. It's certainly a setback, and I wonder if our government fully appreciates the implications of this, the very long-run implications, which reach far beyond the election, to have these negotiations stall.

I am concerned. I am still hopeful that a congressional compromise will be forthcoming. If not, it's possible, after the election, to make many of these things happen after all, but each postponement raises the danger that this very important strategy to connect the countries of the Asia-Pacific will fall by the wayside.

Senator Downe: You would know far more about this than I would, but I understand that part of the problem in the United States is that 20 or 25 years ago, when NAFTA was being developed, there was a lot of support from the Democrats, particularly in the farm community, where the agricultural community was advised that the trade deal would be a great benefit for them. That has flipped completely now. They've seen that that didn't work. They can't count on that core base of Democrats, and this could very well be what Reid is reflecting on in his decision. Is there anything, in your opinion, that the U.S. government can do to reassure that community about future deals?

Mr. Petri: As you know, the NAFTA agreement has been very controversial in the United States, even at the time that it was passed. It was not an easy agreement to pass, and there was a great deal of opposition to it, to a large extent coming from labour. That opposition persists today, and I think it's fair enough that there should be a lot of concern about this, given the high level of unemployment in the United States and our inability to address that problem in the immediate or short term.

One has to remember that trade agreements are not about what's going to happen next year or even in the next three or four years. They're really about the foundations set in place for economic growth, for productivity increases, over a five-, ten-, fifteen-year time horizon. In that period of time, the United States will, we hope, reach full employment again. Trade historically has not affected the level of employment. It has affected the composition of employment, and its effects on the composition of employment tend to be very positive. We know that export jobs pay anywhere from 10 to 20 per cent more than the jobs that import-competing firms give up when trade intensifies.

The effect of trade is to raise wages, to raise the quality of jobs that the U.S. and Canadian economies offer, and the opposition is often short-sighted about this.

Nevertheless, it's extremely important for congressional action on trade to be complemented by actions that address the cost of transitions, which will be significant for a few workers. That's a critical part of a sensible trade policy: to have adjustment assistance that goes along with strong trade.

Senator Downe: I wonder if you could address the ongoing concern about the erosion of manufacturing and the linkage of that in the United States to trade. Now we see the recovery, particularly in the southern U.S.A., of a lot of manufacturing moving back to the United States from offshore, in many cases from Asia.

Mr. Petri: As you probably know, the United States, over the decade from 2000 to 2010, lost some 5.6 million manufacturing jobs: close to one third of all manufacturing jobs in the United States. Although manufacturing employment has been rising again slowly since the depth of the recession, it is unlikely to contribute a large number of new jobs. Manufacturing now accounts for roughly 10 per cent of U.S. jobs. The jobs that are coming back in in manufacturing are sophisticated, high-skilled jobs, accompanied by a lot of equipment, robotics and machinery. I think this is a critical sector, but the attention that we pay to it in the policy dialogue is sometimes out of proportion with its significance.

The main point I want to make is that manufacturing will be certainly helped by the trade agreements we are now negotiating. But manufacturing is not the major source of new jobs in the United States. It's now quite a small sector. What our results do show is a strong intensification under new trade agreements, in two-way trade in manufacturing, in the most innovative and most advanced sectors of the American economy. But, at the same time, many standardized products would continue to be imported from Asia. The intensification of this two-way trade is what tends to raise the quality of jobs by increasing the number of higher-quality jobs, which then replace the lower-quality jobs at the other end of the manufacturing spectrum.

I'm optimistic about manufacturing, but I think the attention that it gets in the public policy debate may exceed its real importance in the economic restructuring that is on the way.

The Chair: I take it, then, you say it's more a political issue that can be used in the United States than a reality.

Mr. Petri: Yes, senator. I think it is a political issue, but it does have a very important, real component, and that is the adjustments that workers experience as the manufacturing sector continues to strengthen. These are very real and need to be addressed by policy. That means adjustment assistance and support for communities that have focused on single manufacturing industries in the past. It means a lot of things, and it means a sophisticated complementarity between trade policy and other types of support to help workers adjust to the jobs of the future.

Senator Oh: I was in the city of Shanghai last year on a seafood promotion trade show. There was only one trade show going on in a seafood restaurant that has seven outlets, and they're promoting Canadian seafood. My question is that I don't think we've done enough in China on seafood promotion. That's only one city, one chain, that's doing the promotion.

The market is huge. In Asia-Pacific, including China, seafood consumption is so high that almost every night you have a dish of some kind of seafood on the table. If you have a guest from overseas visiting China, that is more critical. You have to have fish on the table.

The Maple Leaf logo is a critical selling trademark in China, due to the coastal pollution problem. To them, local seafood is not considered safe seafood anymore to be on the table. It might take a few years before the problem can be rectified. I think we should take advantage of this seafood promotion in China. There's a huge market there.

Mr. McGuinness: China is absolutely amazing. Look at the country in terms of the cities that have populations over, say, 4 million, which for Canada, that's Toronto. I can't remember the number of cities with a population over 4 million, but it's about 10, 15 or 20 cities.

You're quite right. If we had a real initiative for China, not just going to trade shows but really starting to target those cities with populations of 5 million or more, in terms of restaurants, that could be extremely successful. It takes some time and strategy, but, as you say, the per capita consumption of fish in China has risen from about 25 kilograms not that long ago to now 32 kilograms per person. It's an amazing opportunity. I thank you for bringing that to my attention.

Senator Demers: Thank you, both, for your great presentations. I have two small questions.

What impact will rising income have on the demand for imported fish and seafood products in the Asia-Pacific region? And how can Canadian fish and seafood exporters capitalize on the opportunity in the Asia-Pacific region?

Mr. McGuinness: There is no question about what's happening in the Asia-Pacific. That seafood market is increasing, and it's increasing in terms of imports. There is no question that the prices are higher than from the traditional fisheries. These imports are targeting a new segment of the market. They're targeting the segment of the market that in fact can afford these higher prices. Even though there are higher prices, we don't see that as a handicap or hindrance. We see that, as the previous senator mentioned, as just the fact that the populations are increasing in terms of income, and they want to have fish and seafood that they are confident is not only tasteful but that generally has a high level of food safety. That's what we're playing into.

We're also introducing somewhat new species in terms of lobsters and large sea scallops right now. They are terribly expensive, but we can't harvest them enough, because that becomes a bit of a symbol in terms of taking a family to a restaurant and treating them as family and demonstrating your high regard for these people by having lobsters or scallops and so forth.

It's an issue, but it hasn't come up yet. As Dr. Petri said, in terms of this burgeoning, we've just seen the beginning of this transition. Fortunately, as he says also, in most of those countries, you have a system where, for example, their government officials are reasonable people to deal with. They're trying to encourage business and entrepreneurship. Most of Asia-Pacific is quite good.

I'll say the difference between Asia-Pacific and Russia is quite dramatic. Russia right now is a very big market for us, and it's expanding substantially, but it's a high-risk market because market access for a company can be stopped almost immediately, without almost any recourse. Sometimes you may see that in China, but most of the other Asia- Pacific countries, such as Vietnam, Thailand and Singapore, in particular, are generally adhering to Codex and the international rules of market access.

Senator D. Smith: I have a supplemental question on exactly what you said about Russia. Am I reading between the lines? When you saying it can be stopped in Russia, is this basically officials being paid off, which is pretty well recognized as a real problem in Russia?

Mr. McGuinness: It's a significant problem. For example, in terms of our shell-on shrimp, Russia is probably our best market right now. It's $60 million or $90 million just for that particular species.

What we have there is basically at-sea harvesting and processing vessels, minimum processing, and send it into Russia. Most of those vessels right now are either "on ban'' or have a high-inspection requirement.

The Soviet Union used to have barriers in terms of allowable levels of various types of contaminants, extremely low, and they used that to protect their own industry. Of course, two years ago, they joined onto the WTO. In joining the WTO, you're supposed to adopt the rules and regulations with respect to Codex. It's been a struggle to get them to move in that direction.

Senator D. Smith: You're talking bureaucratic corruption, though, aren't you?

Mr. McGuinness: There is no question that that's part of it.

The Chair: Professor Petri, when we study any economic issue, whether it's Asia-Pacific or elsewhere, we have to factor in the United States in many of our cases, not only because of NAFTA but because as leaders and close neighbours, they have a significant effect on our capabilities. TPP, for example, was one example where the United States was lukewarm to start with, before they became more enthusiastic to have Canada join.

Could you give us more insights into the operations and views of the United States towards Asia-Pacific? Are they tending now to utilize more multilateral instruments to further their trade and economic issues, or is the preferred route for them still bilateral?

Mr. Petri: Senator, as you know, the United States is many things, many people and a lot of divergent views. The United States, as any big country and, I think, other big countries in the world have a similar problem, tends to be preoccupied with its domestic political issues in the intermediate term.

Now, what we need in the Asia-Pacific is a different kind of perspective, a much more forward-looking and probably, as you put it, a more international perspective than a series of bilateral relationships driven by domestic interests.

If the architecture of the Trans-Pacific Partnership continues to expand — remember, it has grown from 4 to 12, countries, and our projections include an expansion that will include Korea, Thailand, the Philippines and Indonesia, probably in a future round — it will provide a much firmer basis for regional trade and economic relationships than the bilateral methods now do.

The Chair: Could you expand on the international financial institutions and how the United States uses them as a lever into Asia-Pacific?

Mr. Petri: As you know, the real concern with the international financial institutions now is that they do not have a membership or a voting membership representative of the real structure of the international economy today, and, in particular, the Asian economies tend to be underrepresented.

Now, it is not the United States, it turns out, that is overrepresented but rather Europe, due to its membership through several different countries rather than as the European Union as a whole.

In any case, it would make a big difference, if we could make the international financial institutions, the International Monetary Fund, primarily, more forceful. We face difficult problems in a new world in which capital flows are immense, exchange rates move and where some countries even manipulate exchange rates to achieve development objectives.

It would make a very big difference in this world if you could make the IMF more functional. An important step in that direction would be to give Asia-Pacific countries a larger role and greater ownership in the IMF.

The Chair: To follow up on that, we have studied Brazil and Turkey. We have noticed the political shifts and, therefore, the financial shifts with the so-called BRIC and the expansion of BRIC and other alternatives.

We noticed China's move, particularly, into Brazil and into Africa. I would like your opinion about where you see the Asia-Pacific putting its mark, other than the United States. Do you see them looking to markets in the developing south world, or are they still predominantly looking to the European market?

Mr. Petri: I think they have multiple interests. Certainly, in terms of final product markets, there's no replacement yet for the European and North American markets in terms of wealth and diversity of products that are required. But more and more, a larger share of the exports of Asia Pacific countries go to the region itself.

Part of this is explained by the growth of production networks within Asia, where companies send intermediate products back and forth across borders. But the other part has to do very much with the phenomenon that Mr. McGuinness was describing — wealth and a tremendous growth in consuming power.

In addition to that, they have resource interests. They're looking, obviously, to Africa, Canada, and many other countries in order to try to develop resources that they will need in the future. So they have very diverse interests.

What I don't see coming from the Asia-Pacific is any kind of disruptive influence on the global system. That is, they tend, by and large, to accept the global system as it is. As any country, they probably manage the fringes of rules to their own advantage, but, by and large, Asia has not had a disruptive influence in terms of the international institutions that we have built over the last 50 years.

The Chair: We are studying the security of those nations as well as the economics. There was great angst when President Obama coined the phrase "pivot to Asia Pacific,'' which had a reverberating effect, particularly through NATO and Europe.

It hasn't seemed to have produced much yet. In the security factor, is this "pivot'' something we should consider, and what would it mean in security terms vis-à-vis economics, how we handle goods in the Pacific as opposed to how we handle goods crossing the Atlantic? Can you comment on that?

Mr. Petri: As you know, we don't call it "pivot'' anymore. We call it "rebalancing,'' and it has had from the beginning two very important and independent objectives. One was the strengthening of economic linkages with the Asia-Pacific, and the other, a kind of reorientation of a shrinking military, to make sure that U.S. interests in trade routes and allies in the Asia-Pacific had a sufficient military backing in place.

I am not sure that one would have expected very quick results from this reorientation of America's long-term policy focus. I think that the real payoff will come as the U.S. manages to get these new institutions and this new policy architecture in place. By that I mean the TPP, but the TPP more broadly to also include China, which is obviously the region's largest economy now. These steps will help establish a long-term architecture of cooperative economic relations.

The Chair: Thank you. Some people still call it "pivot.'' I use that. I think "rebalancing'' is a better term.

Do you think we're getting sufficiently ready from the North American side to look at new concepts of how manufacturing, goods and services relate to each other? Countries of origin is becoming a very difficult issue when you have something with Canadian input, American input, Brazilian input or Chinese input. Are we addressing the new flows and new technologies within our economic structures?

Mr. Petri: The answer to that is yes, but by no means as much as we should be. As you know, APEC, the Asia Pacific Economic Cooperation forum, initially envisioned by some leaders as a way to create legally binding agreements, is now basically a cooperation forum where very important issues such as trade facilitation are addressed. We know that for business it makes a very big difference how quickly goods cross borders and how predictably they cross borders, especially in an economy where almost everything consists of components made in many countries.

So this new dimension of interdependence, which is to make sure that trade is seamless and economies are seamlessly connected, both in terms of border barriers such as low tariffs as well as good transport linkages, is now critical. There is attention paid to it certainly in the United States but also within Asian discussions as well.

The Chair: Thank you.

Senator Johnson: Mr. Petri, there have been some reports on a possible banking crisis in China due to shadow banking. Could you give us your take on this issue and how it could impact growth across the Asia-Pacific region?

Mr. Petri: The transition from a government-led and closely held banking system to a more market-oriented one has taken place in virtually every Asian economy over the last several decades. At times it has been quite traumatic. For example, it was very traumatic during the Asian financial crisis in Korea, in Thailand and in Indonesia.

That's the background against which I think we should try to understand what is going on in China now. It has had a fairly closely held government-led banking system, and it is trying to make that transition now to more market- oriented, more open financial mechanisms. That's tough.

Now, the advantage that the Chinese have is they own so much capital and have such high levels of reserves. They can bail out institutions that are in trouble. They just did that with a set of shadow banking commitments in the past week. They have much greater resources to make sure that the transition happens with minimum negative effects on the economy.

This government seems quite committed to doing that, so over the last few months, they have been steadily raising interest rates, deregulating parts of the sector and moving forward.

It is bound to lead to some slowdown in economic growth, but I don't think we can see anything there yet that would suggest a deeper crisis.

Senator Johnson: That's good news. How does the United States view this, sir?

Mr. Petri: I think the United States is hopeful that the good news will continue, insofar as the Chinese economy is now a very important part of the global system. We always used to say that when the United States catches cold, others catch pneumonia. It is becoming a little like that with China, and you can see, for example, stock markets reacting to adverse news coming out of China across the world.

It is a very big economy, a very large part of our global system, and it is important for everyone that the transition there to more market-oriented, more stable, secure financial systems take place in a favourable way.

Senator Johnson: I recently read the latest edition of the foreign affairs magazine out of the States talking about the American socio-democratic future. One of the lead articles was about Indonesia and the Philippines and how these economies are thrusting forward, what's happening and how it's affecting the Chinese markets that you were just talking about. Did you see this latest article from January?

Mr. Petri: Sorry, I have not.

Senator Johnson: It is fascinating about Indonesia and the Philippines. I was surprised about it. Could you comment on that particular country?

Mr. Petri: Southeast Asia is very important. The Philippines is now one of the fastest growing economies in the region. Indonesia, for several years, has been the fastest-growing economy in Southeast Asia. It seems to be slowing a bit. There is a presidential transition coming; policy is somewhat in flux, but there is a great deal of kind of indigenous momentum in the development of all of these countries. Southeast Asia, as a whole, has 600 million people. It is a large cluster of countries that is increasingly integrated, with strong relationships with North America, with the United States. As one turns one's eyes towards the Pacific, one cannot ignore Southeast Asia — or India, for that matter — as important components of this region.

There are a lot of challenges in all of those countries, and Thailand, of course, is the one that we know the most about over the last few weeks, but they share a fundamental momentum due to their hardworking people.

Senator Johnson: I found it incredible, because there are 10 countries and 620 million people. It is something we haven't really addressed much in our country.

Mr. Petri: That's right.

Senator Johnson: Thank you very much.

[Translation]

Senator Fortin-Duplessis: Professor Petri, you said that economic growth in Asia will continue for a long time. Our committee would like to know whether some Southeast Asian countries will stand out more than others in the coming years when it comes to economic growth and development.

[English]

Mr. Petri: Yes, senator. Obviously one cannot answer this question without mentioning China, which is the largest and, at this point, the most rapidly growing of the economies. It is likely to continue to grow rapidly — not as fast as it has in the past; certainly there will be periods of slowdown.

The key point that I want to make is China is not the whole region. There is Japan, a very innovative, very sophisticated country. It is not growing as fast, but is an important market certainly for fish, as Mr. McGuinness mentioned earlier; for agricultural products and for technology.

Then there is Southeast Asia, as we just discussed, which is probably growing nearly as fast as China over the next decade or two. They have, again, lots of resources; lots of indigenous sources of growth.

Then there is India. India is as big as China and will be bigger in terms of population, eventually, in another decade or two. India is also growing very solidly — not as fast as China, but when you look around this region, and you ask yourself in another 10, 20 years, what it will look like, it will be huge, and it will be a lot more prosperous. This is where these 2 billion middle-class people are going to come and eat a lot of fish, as Mr. McGuinness was explaining to us.

[Translation]

Senator Fortin-Duplessis: We have already submitted reports on China and India. We know that those two economies are doing very well. However, we are currently interested in the other countries.

In your opinion, what other countries from Southeast Asia are most likely to have a really powerful economy?

[English]

Mr. Petri: Let me single out two, and one of them is Vietnam. It is an extraordinarily energetic place with lots of good connections and is very ambitious. Their role in the TPP, I think, has been quite amazing. They're willing to consider very fundamental changes in laws and social institutions in order to have better access to international markets. I suspect that they will now benefit very strongly from industries leaving China because of high wages there.

The other country, also large, is Myanmar. We don't know really that much about its future yet because it is still very early stages of entering global markets, but it has a history of making important contributions to the world. It has been well connected to markets in Europe and elsewhere. With good policies, I suspect that that is another country to watch very closely.

The point here is that participating in the global economy and adapting your policy to be successful is contagious, and it has been contagious in Asia for quite some time — for most of the past 50 years. There are fewer and fewer countries left that have not yet caught this "disease,'' and I think Myanmar is one of them.

Southeast Asia, as a whole, particularly due to its integration, and due to the important role that it plays between China, the West and India, is a very important place to watch.

[Translation]

Senator Fortin-Duplessis: This will be my last question. Some Asian countries have a very poor record in terms of human rights. Should Canada still make an effort to do business with those countries or should we instead be rather disinterested when human rights are clearly being violated?

[English]

Mr. Petri: You know, I am an economist, so I have a peculiar professional bias on this question, but I think the best way to get people to govern themselves in a humane and democratically confirmed way is by engaging them, by talking with them, by doing business with them, and by helping them develop. It is development itself that often puts pressure on governments to serve their citizens.

The activity in China, for example, of the communications through Twitter-like Chinese media, puts an enormous amount of pressure on government. It results in people being fired, in policies being reversed, in saving people who would be otherwise in deep trouble. That is, I think, where you can ultimately see long-term progress. To the extent that one's harsh reactions to events or policies in the short run impedes that kind of long-term communication and long-term progress, I don't think it is helpful.

The Chair: Professor Petri, thank you very much for your insights on economic issues. Particularly from your point in the United States, it is extremely helpful in our focusing in on what areas may be of up-and-coming interest, but also concern within Canada's foreign policy. We appreciate your presence here.

Mr. McGuinness, I hope we have underscored to you how important fish is to Canada. It has certainly been underscored by the questions and the interest from senators.

Hopefully something will resonate from both of your inputs in our report. We thank you for being with us.

(The committee continued in camera.)