FAIT Committee Report

CHAPTER II — THE PROBLEM DEFINED:
A SHRINKING CANADIAN PRESENCE IN
A REGION BRIMMING WITH OPPORTUNITY

Asia-Pacific is a vast and populous region, ranging from Afghanistan in the west to the islands of the South Pacific in the east, to Japan and Mongolia in the north and to New Zealand in the south. Indeed, it is practically impossible to discuss Asia-Pacific as a single entity. The region is characterized by remarkable diversity in geography, culture, population density, political systems, economic and social development and personal freedoms. It is marked by the starkest of contrasts. Asia-Pacific includes some of the most densely populated countries in the world, as well as some of the sparsest. It covers some of the richest nations as well as some of the poorest. Modern democracies and market-based economic systems exist alongside Communism, dictatorships and planned economies. The political structure is highly volatile in some countries, and very stable in others.

A total of 3.5 billion people live in Asia-Pacific — primarily in South and East Asia — accounting for well over half of the world’s population. China and India each have over 1 billion citizens. Other heavily populated countries in Asia-Pacific include Indonesia, Pakistan, Bangladesh and Japan. In all, 11 countries in Asia-Pacific have larger populations than Canada.

In terms of economic progress, most economies in Asia-Pacific are still in their developing, or emerging, stages, with a few notable exceptions. However, because of the tremendous population in the region, many of these countries are already among the largest and most powerful economies in the world. While the United States (U.S.) remains the largest national economy worldwide, the size and rapid development of China has made that country the second largest in the world on a purchasing power parity (PPP) basis,¹ followed closely by Japan. India has also experienced considerable growth in recent years, making that country the world’s fourth-largest economy in 2002.²

Not surprisingly therefore, Asia-Pacific is the largest economic region in the world. On a PPP basis, the total value of the region’s gross domestic product (GDP) in 2002 was approximately US$15.8 trillion, equivalent to about one third of global output that year. By comparison, the value of North American output that year was US11.9 trillion while Europe produced about US$12.5 trillion.³

Although the total value of economic output in Asia-Pacific is high, there is a wide range in the level of social and economic development in the region. On one end of the spectrum lies countries and economic regions such as Japan, Australia, Hong Kong and New Zealand. These are all characterized by high levels of per-person economic output (per capita GDP), well-developed public infrastructure, a degree of political stability, predictable legal and regulatory environments and high literacy and life expectancy rates. At the other end of the spectrum are some of the world’s poorest countries, On the United Nation’s list of the 49 least developed countries (LDCs) are 12 countries located in Asia-Pacific — Afghanistan, Bangladesh, Bhutan, Laos, Myanmar, Maldives, Cambodia, Kiribati and Tuvalu, Nepal, Samoa and Vanuatu. Two thirds of the world’s poor live in Asia-Pacific.

A.        Why Asia-Pacific?

Over the course of its hearings in Ottawa, as well as during its travels to the region, the Subcommittee heard overwhelmingly positive evidence about the economic potential in Asia-Pacific. Witnesses were unanimous in their belief that Asia-Pacific presented a tremendous economic opportunity for Canada and that more should be done to improve Canada’s trade and investment relationship with the region.

1.      The Size and Economic Dynamism of the Region

The simplest, and perhaps the most compelling reason for this conviction in the opportunities in Asia-Pacific is the size and economic dynamism of the region. As mentioned above, Asia-Pacific accounts for over half of the world’s population and already contributes more to the global economy than either North America or Europe on a purchasing power parity basis.

Asia-Pacific’s position as a global economic leader comes despite a number of economic setbacks that have beset the region in recent years. Although recent statistics suggest evidence of a long-awaited recovery, Japan, has been mired in a 10-year economic slump, affecting demand for products from other countries within the region. In 1997 and 1998, the Asian Crisis devastated financial markets and plunged several countries into severe recession. The recovery from that recession was prematurely arrested by the bursting of the high-tech bubble in 2000, which was then followed by the September 11th terrorist attacks a year later. Most recently, the outbreak of SARS has provided yet another interruption to the recovery of the Asian economies. The tourism industry in China and Southeast Asia, already struggling from lower air travel in the post-September 11th environment, has been devastated. Although the peak of the SARS crisis has since passed, it remains to be seen what the long-run effects of the outbreak will be on economic growth in East Asia.⁴

Notwithstanding these setbacks which have dampened recent economic growth in the region, many countries in East Asia are emerging as significant world economic powers. The newly industrialized economies (NIEs) made remarkable advances in the 1980s and early 1990s and continue to experience strong growth today. Currently, China, India and parts of Southeast Asia are leading the way in economic growth in emerging Asia. According to the International Monetary Fund (IMF), from 1995 to 2002, the world economy is estimated to have grown by an average of 3.6% per year, after accounting for the effects of inflation. By contrast, the Asian NIEs together grew by an average of 4.8% over the same period, while growth in Asia’s developing countries has been even more pronounced, averaging 6.6% each year.

As Brian Hunter (Senior Economist, Canadian International Development Agency) informed the Subcommittee, this economic growth has resulted in unprecedented poverty reduction in many parts of Asia-Pacific. As Asia-Pacific economies continue to develop, wealth is increasing, improving the spending capacity of the most populous region in the world. Robert Keyes (Vice-President, International Division, Canadian Chamber of Commerce) testified that the increasing wealth of that large population adds up to considerable opportunities for Canada. The outstanding question, he stressed, was how Canada would harness those opportunities.

2.      Market-Based Reforms in Asia-Pacific

One of the factors contributing to these optimistic prospects for economic growth in Asia-Pacific is that a number of countries in the region are engaged in a series of market-based economic reforms aimed at increasing trade, attracting investment and stabilizing financial markets. Indeed, the rapid economic development in much of East Asia can be attributed in large part to the liberalization of markets and the increased emphasis on international trade as a means of growth.

Nowhere is the significance of market-based reforms greater than in China. John Wiebe (President and Chief Executive Officer, Asia Pacific Foundation of Canada) characterized China’s market reforms as “one of the most profound economic transformations of the modern era.” The move towards internal competition in China is creating economic efficiencies and fuelling GDP growth within China. At the same time, China’s emergence on the international economic stage, as evidenced by its recent accession to the WTO, has the capacity to redefine traditional trade flows and market priorities. Indeed, China’s development and its impact on the world economy, is viewed in the rest of Asia as both a threat and an opportunity. The liberalization of trade in China creates unparalleled opportunities for exporters, but at the same time, many countries — particularly China’s neighbours — are concerned that they will be unable to compete with the low labour costs and other economic advantages of a market-oriented China.

While witnesses in Canada were unanimous about the economic opportunities presented by Asia-Pacific as a whole, they were equally unanimous in their belief that the opportunities were greatest in China. The significance of China’s market-based economic reforms and increased focus on international trade cannot be overstated. With its recent accession to the WTO, the world is facing the unprecedented emergence of a market of 1.3 billion people in an economy growing at between 8% and 10% per year. In light of the sheer magnitude of the opportunities presented by such an event, Wendy Dobson (Professor of International Business, Director, Institute for International Business, University of Toronto), stated that next to the United States, China should be Canada’s most important strategic focus.

Although China’s market-based reforms have captured the most international attention, other Asia-Pacific countries have also been actively pursuing reforms of their own. In particular, many countries in Southeast and East Asia are continuing the process of financial market reforms stemming from the Asian Crisis in 1997 and 1998. Japan is undergoing a similar set of reforms aimed not only at the financial sector, but also at jump-starting the Japanese economy. South Asia — India in particular — is also engaging in market reforms, but at a slower pace than in East Asia. Brian Hunter suggested that this more cautious approach to market liberalization has prevented South Asia from realizing the same level of economic development and poverty alleviation as has East Asia.

The specific economic reforms in East and Southeast Asia, China, India and Japan are discussed in more detail in Appendix I.

3.      Economic Integration within Asia-Pacific

Economic reforms are leading many Asia-Pacific countries to become increasingly trade-oriented. Furthermore, a growing proportion of that trade is taking place within the region. In 1990, about 42.1% of all exports from Asia-Pacific countries were destined for other countries in the region. By 2001, that proportion had risen to 48.2%.

There are a number of factors behind the increase in intra-Asia-Pacific trade. John Wiebe suggested that it is in part due to the more frequent use of offshore production centres by Asian manufacturers within the region. The resulting growth in regional supply chains can have an inflating effect on trade statistics. Another factor behind the increase in intra-Asia trade is the emergence of China as a major trading nation. Mainland China, excluding Hong Kong, has become the second-largest exporter in all of Asia-Pacific, accounting for 17.8% of exports from the region in 2001, second only to Japan at 26.9%.⁵

The Subcommittee heard that, given this increase in intra-Asia economic activity, there is a growing awareness and acceptance in Asia-Pacific of the benefits of regional co-operation in areas such as trade, investment and financial affairs. Asia-Pacific is increasingly focusing on building economic relations within the region through the promotion of regional integration agreements. Economic integration agreements are nothing new in the region — organizations like ASEAN⁶ have functioned for several decades — however, the extent of integration and negotiating activity has accelerated in the last several years. These regional integration agreements are described in greater detail in Appendix II.

One of the principal concerns of many witnesses was that the increase in economic interdependence and the rise of regional trade blocs, particularly in East Asia, could effectively shut Canada out of those markets. When trade barriers fall between two countries, this causes goods produced by third-party countries to become relatively more expensive. Some economists argue that while multilateral agreements are economically efficient and produce real gains, bilateral or regional trade agreements are in fact market-distorting from a global perspective because countries within a trade bloc receive preferential treatment compared to those outside the bloc, regardless of whether or not they are more efficient producers.

The Subcommittee was warned that as countries in Asia-Pacific become more interdependent, Canada could lose access to some of the most potentially lucrative markets in the world. Other witnesses disagreed, however, arguing that Canada might in fact benefit from Asia-Pacific economic integration. Robert Bélanger (Canadian Senior Trade Commissioner to Thailand), pointed to two such potential benefits. The first is that economic integration results in the rationalization and specialization of production. The Trade Commissioner used the example of the automotive sector in southeast Asia which is rapidly consolidating in Thailand. He maintained that this process of rationalization would make it easier for Canada to target its efforts in the region. The second major benefit is that trade liberalization within Asia-Pacific will create economic growth, wealth and prosperity in the region. This, in turn, will increase demand for all types of goods, including those produced in Canada.

B.        Sectoral Opportunities in the Region

1.      Investment Opportunities

The rapid economic growth in many Asian countries is expected to create considerable opportunities for foreign companies, particularly on the investment side. Indeed, the Subcommittee was impressed by the magnitude of investment opportunities it saw over the course of its fact-finding missions in Asia-Pacific, particularly in the developing countries.

The Subcommittee learned that a number of low- and middle-income countries are courting foreign direct investment to help finance investments in transportation and municipal infrastructure, including road, rail and utilities construction, electricity generation, hospitals and airports. In addition, many Asian countries are seeking foreign expertise in environmental industries such as water purification and waste management.

Looking more closely at specific countries, there are concerns in India that local capacity in transportation infrastructure has become an impediment to economic growth. Considerable opportunities exist for international firms in infrastructure projects in that country. However, the process of awarding contracts is a lengthy one and represents a major challenge to prospective foreign investors — over and above the challenges of India’s various legal and regulatory hurdles. The Subcommittee was told that other major areas of investment opportunity in India include: oil and gas; telecommunications; biotechnology and pharmaceuticals; and information technology, to name a few.

In Thailand, the Subcommittee heard that the Thai Board of Investment is actively seeking foreign investment in five key sectors: Agriculture/food, automotive, information and communication technologies (ICT), fashion (garments, jewellery, leather) and high-value services. Most countries that the Subcommittee visited, including China, Malaysia and South Korea, identified similar investment priorities.

The Subcommittee is convinced that Asia-Pacific holds significant investment potential for Canadian firms willing to take advantage of the opportunities in the region. At the same time, however, we also heard from a number of witnesses overseas that Asia-Pacific should not be overlooked as a potential source of foreign investment into Canada. While Japan and Hong Kong are the most significant investors in Canada, the rapid economic growth of the ASEAN countries, China and India, creates considerable potential for future investment in the Canadian economy.

2.      Trade Opportunities

In addition to the opportunities for Canadian investment in Asia-Pacific, as well as the potential for attracting investment from the region into Canada, the Subcommittee has also learned of tremendous potential to increase trade with the region. The most promising include the automotive, wood products, information, telecommunications, aerospace, environmental, advanced materials, energy, life sciences, professional services, and plastics sectors.

For example, Robert Greenhill (President and CEO, Bombardier International) told of considerable opportunities in regional aircraft and rail cars as cities struggle with mass urbanization. Other witnesses spoke of roles Canada could play in environmental industries such as water treatment and waste disposal. The need for construction and related consulting and engineering services is also considerable in a number of developing countries, particularly in India.

As well, the growth of a prosperous middle class is creating new demand for consumer-based products and services. Given the large populations of many of these countries, the impact of this increased demand could be enormous. The Subcommittee heard that the emerging middle class in India, for example, numbers between 30 million and 50 million households. While this represents but a small fraction of India’s total population, it is greater than the entire population of Canada.

Among the specific opportunities in consumer goods, several witnesses, including Peter Barnes (President and CEO, Canadian Wireless Telecommunications Association), told of tremendous growth in demand for wireless telecommunications products. Developing countries that lacked adequate infrastructure for land line telephones are skipping directly to cellular telephones, personal digital assistants (PDAs) and wireless internet.

Over the course of its travels, the Subcommittee learned of other market opportunities for Canadian consumer goods and services in Asia-Pacific. In some cases, these opportunities were remarkably consistent across the region. In general, potential exists in areas such as finance and insurance, fashion, education, food, wood housing and cultural/leisure activities.

In other cases, market opportunities are more specific. In South Korea, we learned that movement from a six-day to a five-day work week is expected to increase consumption of cultural and leisure products. Similarly, the growing worldwide popularity of the Indian entertainment industry presents opportunities for Canadian companies in that sector. Finally, the Subcommittee heard several times that the growing middle class in emerging Asia has tremendous potential for the Canadian tourism industry. Although Canada is a great distance away, it enjoys an excellent reputation as a tourist destination, in addition to the fact that many Asians have connections to the country through friends or family who emigrated to Canada.

C.        Canada’s Presence in Asia-Pacific: Why is it Shrinking?

A number of witnesses expressed concern that Canada was losing significance as an economic presence in Asia-Pacific. Despite recent declines, Canadian exports to Asia-Pacific have, in aggregate, risen over the past ten years. However, they have not kept pace with the growth of imports into Asia-Pacific in general. The Subcommittee heard that as a result, Canada’s market share of Asian imports is only 65% of its level of ten years ago. Details on Canada’s trade and investment relationship with Asia-Pacific are discussed in Appendix III.

Despite the strong growth in imports from Asia-Pacific, the region has declined in significance as a trading partner for Canada. In the late 1980s, Asia-Pacific accounted for over 13% of Canada’s total two-way trade worldwide. Since that time, the share of Canadian trade taking place with Asia-Pacific countries has fallen to below 10%.

In the case of Canadian exports to the region, the decline is even more acute. In 1988, just under 13% of Canada’s total merchandise exports worldwide were destined for Asia-Pacific. However, as Canadian exports fell post-1997, so too did the significance of the Asia-Pacific market. By 2002, Asia-Pacific accounted for only 5% of Canada’s total merchandise exports.

This loss of market share in Asia can be explained at least in part by the emergence of China as a trading partner in the region. As trade between China and the rest of Asia-Pacific grows, by definition the market share of other countries outside the region must fall, even if their total value of trade remains unaffected. However, as John Wiebe stated, this mathematical truism does not absolve Canada of its relatively poor record of trade and investment growth in Asia-Pacific in recent years. While few countries trading into Asia-Pacific have improved their market share, research at the Asia Pacific Foundation of Canada (APF Canada) showed that Canada has one of the poorest records in this area. The same research showed that if Canada had maintained its market share in Asia-Pacific, the result would have been an annual increase in exports of at least $6 billion over current levels.

The Subcommittee is concerned that Canada is in danger of losing even more market share in the region. While economic integration in Asia-Pacific continues, a number of countries outside the region have actively pursued free trade negotiations within Asia-Pacific, in order not to be shut out of potential economic opportunities. The United States has successfully negotiated a free trade agreement with Singapore, is negotiating with Australia and expected to commence negotiations with Thailand. Mexico is also pursuing trade agreements with Singapore, and Japan, while South Korea and Thailand have both expressed interest in opening discussions with Mexico. Chile is also active in pursuing trade liberalization agreements.

A key reason for Canada to act quickly and redouble its efforts to expand its economic presence in the region, particularly in China, is what some witnesses called “first-mover advantage.” In the context of international trade, first-mover advantage refers to the fact that late entrants into specific markets are at a disadvantage because they must compete with established players who enjoy the advantages of experience and name recognition. Wendy Dobson advised the Subcommittee that given that Canada is a late entrant in many other Asian markets, it is all the more critical to act quickly to focus its efforts on the emerging Chinese market where Canada already benefits from a positive reputation thanks to the work of Dr. Norman Bethune.⁷

On the investment side, Canada’s record in Asia-Pacific is somewhat better. Preliminary estimates indicate that Canada’s foreign direct investment (FDI) in Asia-Pacific was worth a record $36.6 billion in 2002.⁸ Although Canadian investment in Asia-Pacific has increased considerably — by an average of 13.9% annually since 1990 — Canadian investments in Latin America and Eastern Europe have grown even more rapidly. As a result, Asia-Pacific began to decline in importance as a destination for Canadian investors. From a high of 10.8% in 1994, Asia-Pacific’s share of Canadian total FDI worldwide fell to a low of 6.8% in 2000. In the past two years, however, investment in the region has picked up and Asia-Pacific is once again growing in importance as a destination for Canadian FDI.

At the same time, investment by Asia-Pacific countries into Canada is also beginning to increase following an extended period of stagnation. Investment in Canada by Asia-Pacific countries had in fact been declining steadily since the Asian Crisis. However, this trend was broken in 2001 and a year later, inbound FDI from Asia-Pacific reached a record $17.2 billion. Even so, the significance of Asia-Pacific as a source of investment into Canada remains much lower than in the recent past. As John Klassen (Executive Director, Investment Partnerships Canada, Dept. of Industry) observed, FDI from Asia-Pacific accounts for only about 5% of total Canadian inbound investment, down considerably from a high of 8.2% in 1993.

D.        Making Asia-Pacific a Priority

The Subcommittee is convinced that the Asia-Pacific market holds tremendous potential for Canadian investors and exporters. Indeed, given the size and rapid economic development of a number of Asian countries, it would be difficult to overstate the magnitude of the opportunities in the region.

However, the Subcommittee also believes that Canada has not taken full advantage of these opportunities in the past. It notes that trade and investment with Asia are increasing, but at a much slower rate than a number of other countries exporting to, and investing in, the region. As a result, Canada’s market share and presence in the region is diminishing at a time when, given the emergence of China and its effect on surrounding countries, the economic opportunities may never be greater.

It is critical that Canada reverse this trend. Canada is dependent on trade to sustain its standard of living and trade is of primary importance in ensuring long run economic prosperity. Exports account for over 41% of national GDP and sustain a significant proportion of Canada’s overall employment.

In addition to the direct economic opportunities presented by Asia-Pacific, several witnesses, including Patty Townsend (Executive Director, Canadian Agri-Food Trade Alliance), expressed their belief that, given the increase in trade protectionism in the United States, as well as the number of high-profile trade disputes between Canada and the U.S., Canada needs to reduce its dependence on the U.S. export market. While not all witnesses advocated trade diversification as a matter of explicit government policy, there was considerable agreement that Asia-Pacific should be Canada’s number one priority outside of the United States.

The Subcommittee agrees with those witnesses who stated that Canada’s NAFTA partners should continue to be its number one policy priority from a trade and investment standpoint. However, we are also convinced that no other region in the world today is as dynamic or holds as much economic promise as Asia-Pacific. Trade growth is critical to the Canadian economy and standard of living. The Subcommittee believes that nowhere in the world is the potential for trade growth greater than in Asia-Pacific. We therefore recommend:

Recommendation 1:

That in light of the tremendous economic opportunities in Asia-Pacific, as well as the importance of trade growth to maintaining Canada’s standard of living, the federal government make the expansion of economic ties with Asia-Pacific its number one policy priority for increased trade and investment with countries outside of the NAFTA area.

At the same time, however, it is important to recall that Asia-Pacific is a vast area, comprised of dozens of countries and economic regions at radically different stages of economic, social and political development. As such, it follows that some markets in the region would be easier to penetrate, offer lower risks and yield greater returns than others.

This suggests that, to some extent, the most effective way to accomplish the objective of expanding trade and investment with Asia-Pacific as a whole is for the Canadian government to place particular emphasis on certain markets within the region and thus concentrate its resources on improving economic ties where the strategic benefits to Canada would be greatest. This would allow for more targeted, and therefore more effective, strategies aimed at enhancing trade and would also be a more efficient use of federal government resources.

However, this is not to suggest that trade and investment opportunities do not exist all across the Asia-Pacific region. Indeed, Canadian companies have enjoyed success in trade and investment throughout Asia-Pacific, including in some of the least-developed countries in the region. The Subcommittee heard from one Canadian organization in Singapore cautioning that businesses make the ultimate decision on where their market opportunities are greatest and that in focusing on key markets in Asia-Pacific, the federal government should be careful not to explicitly or implicitly discourage Canadian companies from pursuing trade and investment opportunities elsewhere in the region.

The Subcommittee agrees that the role of the federal government is not to unduly influence business decisions. The strategy of emphasizing key markets in Asia-Pacific is intended, rather, as a directive of where an increase of government resources and effort would most effectively be made — without presupposing that opportunities do not exist elsewhere, or that resources be redistributed within the region. In other words, the strategies for improving trade and investment outlined in Chapter III below should extend across Asia-Pacific and not solely to Canada’s key markets in the region.

The federal government has identified eleven countries worldwide as priority areas for increasing trade and investment ties. Of those eleven countries, three are in Asia-Pacific — China, Japan and India.⁹ As the second-through fourth-largest economies in the world on a purchasing power parity basis, these three countries are hardly controversial choices. At the same time, however, the Subcommittee is concerned that, given the tremendous economic opportunities elsewhere in the region, Canada should ensure that other significant markets are not overlooked.

In particular, we believe that more effort should be placed on increasing trade and investment with South Korea and members of the ASEAN community — especially the more advanced economies such as Singapore, Thailand and Malaysia. Indeed, as our third-largest trading partner in the region, Asia-Pacific’s fourth-largest economy, and the leading source of foreign students into Canada, we believe that South Korea offers considerable potential that should not go unexplored. For these reasons, we were surprised that South Korea was not initially included on our travel itinerary. As for the leading members of the ASEAN community, their rapid growth, combined with the process of economic integration through regional free trade agreements, creates not only direct trade and investment opportunities, but also makes some ASEAN countries attractive as regional bases from which to expand further into the Asia-Pacific market.

Based on the advice of witnesses and its own observations, the Subcommittee recommends:

Recommendation 2:

That, although it has already identified China, Japan and India as its priority markets in Asia-Pacific, the Canadian government ensure that opportunities to improve economic ties with other countries in the region are not missed. These opportunities are particularly evident in South Korea and the leading members of the ASEAN community — Thailand, Singapore and Malaysia — among others.

For the most part, when witnesses spoke of the need to improve trade and investment ties with Asia-Pacific, the focus was on outbound flows — increasing Canadian exports to the region and encouraging Canadian investment abroad. The benefit to Canada of attracting inbound flows from Asia-Pacific was not frequently mentioned.

However, the Subcommittee did hear from some witnesses that Canada tends to overlook emerging economies in Asia-Pacific as potential sources of foreign direct investment. Indeed, as discussed in Appendix III, only a few Asia-Pacific countries are significant investors in Canada — Japan, Hong Kong and Australia. Furthermore, as John Klassen informed the Subcommittee, the Canadian government, in its ongoing efforts to attract foreign investment, is focusing on eight priority markets worldwide, of which only Japan is located in Asia-Pacific.¹⁰ However, we were told that emerging Asia was an excellent, rapidly-growing, and largely untapped source of foreign investment.

Canada’s selling points as a destination for FDI from Asia-Pacific differ considerably from the benefits to Canadian companies of investing in that region. Canadian investment in Asia-Pacific is often the result of service industries such as finance and insurance establishing operations abroad — most service industries require a physical presence in the region in order to sell their products. As well, manufacturing companies invest in many Asia-Pacific countries to take advantage of the low-cost labour environment. For example, the Subcommittee heard that most of China’s exports to the world are in fact produced by multinational corporations which have invested in low-cost production facilities in that country and then re-export products back to markets such as the U.S., Canada and Europe. We were told that this pattern of investment and trade accounts for China’s large trade surplus with countries such as the U.S. and Canada.

However, most labour-intensive manufacturing takes place in low-value-added industries. While some Canadian manufacturing industries will have difficulty competing with low-cost production in countries like China, Canada still has an important advantage in knowledge-intensive, high-value-added industries. Indeed, the Subcommittee heard in China that despite the abundance of workers in that country, wages and salaries for skilled labour were higher than in Canada because of the shortage of high-quality workers. In other words, Canada retains a competitive advantage in high-tech production.

In order to attract more FDI from Asia-Pacific, the Subcommittee believes that Canada can also take advantage of its NAFTA ties to promote itself as a gateway to the U.S. market. Some witnesses in Asia-Pacific were skeptical of this approach, stating that if they were interested in accessing the U.S. market, it would be more effective to go directly to the U.S. Others disagreed, pointing to Canada’s multicultural makeup and reputation as a safe, tolerant society as factors that would make Canada a preferable investment destination.

There are several ways in which increasing investment flows from Asia-Pacific benefit Canada. Foreign investment creates jobs, and can bring new productivity-enhancing technologies and techniques to the country. In addition, since Canada is a relatively small consumer market, most foreign-owned production is intended for export — either to larger markets like the U.S., or back to the country from which the investment originated. In either case, higher exports would improve Canada’s trade balances with other nations.

As countries such as China and India continue to develop, local companies are expanding, gaining knowledge and expertise in areas such as computer software and applications, biotechnology and other high-tech industries. These companies are beginning to look abroad for strategic partnerships and new markets for their products. Given the availability of a skilled, productive workforce, Canada would be a natural fit for foreign investors. The Subcommittee firmly believes that more should be done to promote Canada as a destination for FDI from all across the Asia-Pacific region. We recommend:

Recommendation 3:

That when working to enhance trade and investment ties with Asia-Pacific, the federal government not only focus on encouraging Canadian exports and outbound investment, but also look for ways to attract more foreign direct investment into Canada from the region. In particular, more should be done to encourage investment from emerging economies.

Establishing a successful economic relationship with any Asian country requires patience and a long-term view. However, the Subcommittee heard from numerous witnesses that Canada’s past efforts to promote trade and investment have been often been erratic. Several witnesses, both in Canada and in Asia-Pacific, offered examples of beneficial government programs that have been discontinued because of a lack of financing or initiatives that are too inconsistent to yield long-term gains. As Wendy Dobson stated:

In the late 1980s, I saw a shift in focus to Asia in the Pacific 2000 Program. But then rivalries within the government for resources meant that program was closed down and resources diverted elsewhere, until we were the hosts of APEC, and then there was another injection of resources. This won’t do. Either we get serious or we don’t proceed at all.

Inconsistent financial commitment has costly implications for Canada. Not only does ad hoc, unreliable financing undermine the effectiveness of trade and investment policy, but it damages Canada’s reputation in the region as well. One witness in Kuala Lumpur stated that this sort of erratic behaviour had acquired Canada a reputation for being “fickle”.

While traveling in the region, the Subcommittee heard repeatedly that Canada needs to demonstrate sustained interest in promoting trade and investment and that a more coordinated approach, with stable and predictable financial support, is needed to realize long-term gains. We were frequently reminded that establishing business relationships in the region is a long and time-consuming process. In Japan, we were told that once these had been established, however, customers tended to be very loyal and were not easily lost.

The Subcommittee believes that Canada’s resources to promote trade and investment are most effectively used when tightly focused in a few key markets and not widely dispersed. In light of the testimony received, we also agree with those witnesses who claimed that if the federal government is to follow the advice of the Subcommittee and make the expansion of economic ties with Asia-Pacific a policy priority, then it must be prepared to make the necessary concerted and sustained commitment to that policy.

Recommendation 4:

Because a sustained effort is needed in order to yield meaningful results, the federal government should not give Asia-Pacific intermittent attention as in the past, but commit itself to a long-term strategy for expanding trade and investment with the region.