CIIT Committee Report

A. Regional Overview

Southeast Asia[4] comprises mainland Asia, east of India and south of China, and the island arcs and archipelagos to its east and southeast. Mainland countries include: Cambodia, Laos, Myanmar (Burma), Thailand and Vietnam. Maritime countries include: Brunei Darussalam, Timor-Leste (East Timor), Indonesia, Malaysia, the Philippines and Singapore. These 11 countries and 12 territories encompass 4.5 million square kilometres, and more than 568.3 million people who speak no less than 27 languages. The dominant religions of Southeast Asians are Buddhism, Islam, followed distantly by Christianity.

All of these Southeast Asian countries are members of the Association of Southeast Asian Nations (ASEAN) but for Timor-Leste, which is a candidate for membership.

B. The Association of South East Asian Nations

1. Economic Overview

The Association of Southeast Asian Nations or ASEAN was established on August 8, 1967 in Bangkok by its five original member countries: Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam joined ASEAN on January 8, 1984, Vietnam on July 28, 1995; Laos and Myanmar on July 23, 1997; and Cambodia on April 30, 1999. As agreed in its founding declaration, the Bangkok Declaration, the Association aims to:

1.      accelerate economic growth, social progress and cultural development in the region; and

2.      promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.

In 2006, ASEAN countries recorded a combined GDP of about US$921.6 billion. Strong and stable economic growth seems quite the norm throughout the region, as real GDP growth has averaged about 5.4% per annum over the past 5 years (see Table 1).[5] With an average annual income of just US$2,041 per capita in 2006, ASEAN, with the exception of Singapore, is comprised of low middle-income countries, according to the United Nations classification system.

Table 1

ASEAN-4 Real Gross Domestic Product Annual Growth Rates, 2002-2006

ANASE-4	2002	2003	2004	2005	2006
Indonesia Malaisia Philippines Thaïlande	4.5 % 4.4 % 4.4 % 5.3 %	4.8 % 5.5 % 4.9 % 7.1 %	5 % 7.2 % 6.2 % 6.3 %	5.7 % 5.2 % 5 % 4.5 %	5.5 % 5.9 % 5.4 % 5 %

Source: International Monetary Fund, World Economic Outlook Database, April 2007

By international standards, ASEAN economies are very open. For example, ASEAN merchandise exports accounted for more than US$750.7 billion in 2006, while its merchandise imports accounted for US$654.1 billion. Combining these two data, merchandise trade amounts to 152% of ASEAN GDP. Additionally, the total ASEAN net inflow of foreign direct investment (FDI) amounted to US$52.4 billion in 2006.

2. ASEAN Free Trade Area (AFTA)

The ASEAN Free Trade Area (AFTA) is an agreement that was signed on January 28, 1992 in Singapore by the member countries of ASEAN and covers their manufacturing sectors. When the AFTA agreement was originally signed, ASEAN had six members: Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand (also known as the ASEAN-6). Timetables for meeting free trade obligations under the agreement, therefore, differ according to whether the country is a pre- or post-1992 ASEAN member.

ASEAN member countries have made significant progress in lowering intra-regional tariffs through the Common Effective Preferential Tariff (CEPT) scheme under the AFTA agreement. More than 99% of products found on the CEPT Inclusion List (IL) of the ASEAN-6 have had their tariffs brought down to the 0-5% range. ASEAN’s newer members, namely Cambodia, Laos, Myanmar and Vietnam, are not far behind in the implementation of their CEPT commitments, with about 66% of products on this list having tariffs within the 0-5% tariff range. In 2006, Vietnam brought down its tariff on products on the Inclusion List to no more than 5% duties, while Laos and Myanmar are scheduled to do the same by 2008 and Cambodia by 2010.

In 2007, tariffs on about 65% of the products on the IL of the ASEAN-6 have been eliminated. The average tariff for the ASEAN-6 under the CEPT scheme is 1.51%, down from an average of 12.76% when the tariff cutting exercise began in 1993. Products that remain outside the CEPT-AFTA Scheme are those on the Highly Sensitive List (i.e., rice) and the General Exception List.

ASEAN member countries have also resolved to work on the elimination of non-tariff barriers. This work includes:

·        the process of verification and cross-notification;

·        the working definition of Non-Tariff Measures (NTMs)/Non-Tariff Barriers (NTBs) in ASEAN;

·        the setting up of a database on all NTMs maintained by member countries; and

·        the eventual elimination of unnecessary and unjustifiable non-tariff measures.

3. Open Skies Agreement

ASEAN countries have also adopted an “Open Skies Policy,” with the aim of liberalizing air travel between member countries. In October 2003, in Myanmar, the ASEAN Transport Ministers endorsed an agreement that will implement the liberalization of air routes between the capital cities of member countries beginning in 2009. The agreement will be expanded to cover other cities by 2015. Singapore and Malaysia are in separate talks to open the Singapore/Kuala Lumpur route before 2009.

4. ASEAN Plus Three Cooperation

The ASEAN Plus Three cooperation initiative began in December 1997, in the midst of the Asian Financial Crisis of 1997-98, with the convening of an informal Summit of Leaders of ASEAN and their counterparts from East Asia, namely China, Japan and South Korea. Since then, ASEAN has held a regular series of meetings of heads of government and ministers of foreign affairs, trade and investment, and finance, with counterparts of the three East Asian countries. The leaders have agreed to:

·        accelerate the development of regional growth areas, including the Mekong River Basin;

·        establish an East Asian Business Council to promote private sector participation;

·        enhance monetary and financial cooperation by strengthening policy dialogues, coordination, and collaboration on financial, monetary, and fiscal issues; and

·        intensify coordination and cooperation in various international and regional forums such as the UN, the WTO, APEC, ASEM, and the ARF, as well as in regional and international financial institutions.[6]

Bilateral trading arrangements between ASEAN and China, ASEAN and Japan, as well as ASEAN and South Korea are currently underway. It is expected that these arrangements will, in the near future, serve as building blocks for the possible establishment of an East Asia Free Trade Area (EAFTA).

5. Canada-ASEAN Trade and Investment Opportunities and Challenges

The first formal meeting between Canada and ASEAN was held in February 1977. From this meeting, Canada committed to extend a programme of development assistance, which was formalized in 1981 with the signing of the ASEAN-Canada Economic Cooperation Agreement (ACECA). Since that time, Canada has contributed more than $2.8 billion in development assistance to the region.

Canada-ASEAN relations have progressed, and are continuing to progress, on the social front, but they remain largely underdeveloped on the economic front. Currently, about 300,000 Canadians travel to Southeast Asia annually, and more than 2,000 Southeast Asian students study at Canadian universities each year. Meanwhile, Canada’s economic interests in the region are reflected in modest two-way trade and one-way foreign investment from Canada to the ASEAN region. Canada-ASEAN two-way trade was valued at $12 billion in 2006, with about three-quarters of it headed to Canada ($8.93 billion) and one-quarter of it headed to ASEAN ($3.23 billion). Canadian FDI in the region was valued at $9 billion in 2006, with about 80% of it located in Singapore.

In assessing Canadian opportunities for further economic relations with ASEAN, a number of factors must be kept in mind. First and foremost, ASEAN economies have, historically, been founded on agriculture, and have expanded their business networks based on a trade route/port approach. In the past two or three decades, however, rapid industrialization and economic transformation in ASEAN countries have resulted in the export of high value-added manufactured goods and sophisticated machinery and equipment. ASEAN countries are now more appropriately classified as “Emerging Economies,” This new classification has been accompanied, however, by considerable economic adjustments and challenges.

The most recent, and arguably most significant, development in this regard is the appearance of China on the international scene which, through its accession to the World Trade Organization (WTO), poses a number of additional challenges and opportunities for ASEAN, necessitating yet more economic adjustment. Looking forward, the principal challenge to ASEAN member countries remains the Association’s further integration, which largely rests on the elimination of their non-tariff barriers.

ASEAN is not yet a single market, but it is on its way to becoming one. Canadian companies can well begin to consider and even implement ASEAN-wide strategies in their approach to trading and investing in Southeast Asian markets. A Canada-ASEAN free trade agreement would be pre-mature, however. ASEAN must first show the resolve to eliminate its many non-tariff barriers between member countries, which would be an important component of any Canada-ASEAN free trade agreement. A bilateral free trade agreement with any or all of its East Asian country counterparts would also be a desirable stepping stone to either a Canada-ASEAN or a Canada-East Asia free trade agreement.

In support of existing and hopefully expanding economic relations, Canada would do well to consider entering negotiations of a Trade and Economic Cooperation Arrangement (TECA) with ASEAN. Indeed, the Committee recommends:

Recommendation 14:

That the Government of Canada commence negotiations of a Trade and Economic Cooperation Arrangement (TECA) with the Association of South East Asian Nations (ASEAN), which would include strong and appropriate human rights provisions.

6. Indonesia

a) Economic Overview

Indonesia, a country consisting of more than 17,000 islands, is the world’s largest archipelagic state. With a population of 234 million people, it is also the fourth most populous country of the world. Approximately 124 million people, or slightly more than 50% of Indonesians, live on the island of Java; it is one of the most densely populated regions of the world. Constitutional guarantees of religious freedom apply to the six religions recognized by the state: Islam (88%), Protestantism (5%), Catholicism (3%), Buddhism (2%), Hinduism (1%) and Confucianism (less than 1%). Combining the percentage of the population which practises Islam with that of the country’s total population, one finds that Indonesia is the most populous Muslim nation, although officially it is not an Islamic state. There is considerable regional religious diversity however, as on the resort island of Bali more than 90% of the population practises Hinduism. Bahasa Indonesian — the national language, a form of Malay — is the language of most written communication, education, government, business, and media.

Indonesia’s GDP was estimated at C$413 billion in 2006, amounting to C$1,860 per capita. The Indonesian economy is, therefore, the largest of the ASEAN economies and it has been growing by more than 5% per annum over the past five years. Indeed, given the exceptionally good performance of the economy in the first three-quarters of this year, real GDP growth could top 7% in 2007. In 2005, Indonesia ran a trade surplus with export revenues of US$83.64 billion and import expenditures of US$62.02 billion. Indonesia’s main export markets are Japan (22.3% of Indonesian exports in 2005), the United States (13.9%), China (9.1%), and Singapore (8.9%). Indonesia’s major import suppliers are Japan (18.0%), China (16.1%), and Singapore (12.8%).

The services sector dominates the economy in terms of value of output, as it accounts for more than 45% of GDP, and it is followed closely by industry (41%) and agriculture (14%). However, agriculture employs more people than other sectors, accounting for about 44% of the country’s labour force of 95 million. The services sector employs 36.9% and industry 18.8% of the labour force. Major industries include petroleum and natural gas, textiles, apparel, and mining. Major agricultural products include palm oil, rice, tea, coffee, spices, and rubber. This economy is mostly market-based, but the government — or governments, since there are more than 400 of them when including regional governments — also plays a significant role. There are 158 state-owned enterprises, and the government administers prices on several basic goods, including fuel, rice, and electricity. Indonesia’s major imports include machinery and equipment, chemicals, fuels and foodstuffs.

In March 2007, the Indonesian Parliament passed the government’s new investment law that clarifies the legal framework for foreign investors, as well as providing certain incentives for FDI. The legislation replaces the 1967 Foreign Investment Law with an investment regime that is much more open to FDI across a wider number of sectors. Some of the key elements of the legislation are:

·        Domestic and foreign investors (regardless of their country of origin) are guaranteed equal treatment;

·        Investors may freely discharge their assets in accordance with other relevant laws;

·        Investors have the right to freely repatriate and transfer funds in foreign exchange;

·        The government will not nationalize or seize assets except through the issuance of a law;

·        Land tenure rights are extended for those investments that improve economic competitiveness — land cultivation rights from 35 to 95 years, building rights from 30 to 80 years and land use rights from 25 to 75 years; and

·        Foreign investors will be entitled to two-year residency permits that can be convertible to permanent residency permits.

The legislation also provides various tax incentives (i.e., exemption of income tax, import duties and value-added tax on capital goods, inputs and intermediate materials) for those investments that meet certain criteria. It also creates a ‘one-stop shop’ for investment approvals and licensing through the existing Investment Coordinating Board (BKPM).

Given the passage of the country’s new investment law, a large reduction in very generous government fuel subsidies, a more onerous budgetary spending approval process,[7] favourable balance of payments surplus, and an improved external debt management plan,[8] expectations are that the Indonesian economy will grow by more than 6% over the foreseeable future. Economists and government officials were cautiously optimistic in achieving this target, as it is widely believed that a 7% GDP annual growth rate is required to arrest any rise in the unemployment rate (11% in 2006) given that about 3 to 4 million new job seekers enter the labour market each year.

Economic growth rates of more than 7% were thought not possible without the government first addressing the country’s infrastructure deficit, a deficit that stands in stark contrast to the favourable circumstance found in China and Vietnam, and despite high recorded returns on investment. Resolution of the infrastructure deficit is believed dependent on considerable investment — mostly foreign investment — which, in turn, depends on an improvement in the ministerial approval process, tax laws offering clearer rules and less arbitrary rulings, and a judicial system providing greater legal certainty.

b) Canada-Indonesia Trade and Investment Relationship

Canadian relations with Indonesia are both positive and growing since development assistance first began in 1954. Today, Canadian development assistance to Indonesia, concentrated in Sulawesi province, amounts to about $23 million per year. Following the tsunami disaster of December 2004, in which Aceh province was by far the most affected area — 170,000 dead and more than 500,000 displaced — Canadian citizens raised more than $213 million that will be spent over a five-year period in support of relief and reconstruction efforts in Indonesia and other affected countries.

Two-way trade between Canada and Indonesia totalled $1.74 billion in 2006, an increase of 6% from 2005. Canadian exports to Indonesia totalled $797 million in 2006, up 15% from a year earlier. Major export products included cereals, wood pulp and fertilizers. Canada is also a major exporter of asbestos to Indonesia, a fact that concerned some of the Committee members that travelled to the region. Indeed, Indonesia is the fourth largest destination in the world for Canadian asbestos, although the total value of asbestos exports has fallen by 60% since 2001. For their part, Canadian imports from Indonesia reached $946.7 million in 2006. Those imports consisted mostly of rubber, woven apparel and electrical machinery.

The stock of Canadian FDI in Indonesia was $3.17 billion in 2006, down 24% from an all-time of $4.2 billion in 2002. Indonesia ranked 19^th overall in terms of Canadian direct investment abroad (CDIA), or fifth regionally (after Australia, Japan, Hong Kong and Singapore). Much of this investment is in the natural resources, manufacturing and financial services sectors. Major Canadian firms with investments in Indonesia include Manulife Financial, Sun Life, Husky Oil, Talisman, Palliser Furniture, Bata and, until its sale to the Brazilian Companhia Vale de Rio Doce (CVRD), Inco Inc.

A number of controversial rulings however, including a spurious bankruptcy judgment against Prudential Plc in 2004 in which the Government of Canada had to intercede, provide a general perception of corruption and an ineffective legal system that hampers foreign investment in, and trade with, Indonesia. Notwithstanding these challenges, and despite the loss of Inco Inc., further Canadian FDI flows to Indonesia look promising, leading to exploratory discussions on a foreign investment protection agreement between the two countries. Meetings of respective country ministry officials were also held to address Indonesia’s ban on Canadian beef.

c) Economic Opportunities and Challenges in Indonesia

Indonesia holds significant trade and investment opportunities for Canadian firms. Canadian business opportunities lie mainly in manufacturing, power generation, mining and related equipment, and agriculture. However, investors face many challenges in doing business in Indonesia, including corruption and an uncertain regulatory climate. Although some of these challenges are believed to have been addressed with Indonesia’s new investment law, suspicions linger. In July 2007, the government released its negative investment list that outlines sectors where foreign investment is restricted. The list provides an opening to foreign investment in 69 of 338 defined sectors, but 11 sectors became more restrictive and 25 sectors do not permit any foreign investment, up from 11 sectors. A “grandfathering” clause for investments already made in sectors not previously found on the negative list is expected. The Indonesian government has provided more clarity, but it is sending mixed signals on its intentions with foreign investment.

In support of existing and hopefully expanding trade and investment relations between Canada and Indonesia, Canada ought to consider entering negotiations of a FIPA. Such an agreement might also incidentally lead to greater trade between Canada and ASEAN. Therefore, the Committee recommends:

Recommendation 15:

That the Government of Canada enter negotiations of a foreign investment protection and promotion agreement (FIPA) with Indonesia.

7. Singapore

a) Economic Overview

Singapore has a robust and dynamic economy, being the third largest in Southeast Asia (after Indonesia and Thailand) notwithstanding a rather modest population of only 4.68 million people (2007), of which 3.7 million are permanent residents. Singapore’s real GDP has grown by 7.7% on average over the past three years and, in the first half of 2007, it has grown a further 7.9% (annualized). As a city-state that can draw on only a limited number of natural resources — unlike many of its ASEAN neighbours who are endowed plentifully — but which is strategically located on major sea lanes of the Malaysian Peninsula, Singaporeans have built their economy based on a skilled labour force and modern infrastructure, complemented by a pro-business mindset and favourable trade and investment policies. This economy is dominated by manufacturing activities — principally, electronics and chemical products — and services — principally, wholesale and retail trade — and is valued at approximately US$132.2 billion in 2006.

Singaporeans, who speak and have adopted four official languages (i.e., Chinese (Mandarin), English, Malay and Tamil), can thus boast of a per capita annual income of US$28,248 in 2006, the highest in the region.

Singapore’s formula for success has largely been a function of its ability to develop an export-based economy fuelled by foreign investment. Given its small domestic market, Singapore is highly trade dependent and, given that it is surrounded by neighbouring countries with a combined population of more than 3 billion and GDPs exceeding US$5 trillion, it has positioned itself as the gateway to Asia-Pacific. Consequently, Singapore is a major destination for FDI in high-tech industrial clusters, while many labour-intensive operations have moved to lower labour cost locations in the region. There are more than 7,000 multinational corporations from North America, Europe and Japan located in Singapore, and they account for about two-thirds of the country’s manufacturing output and exports.

Singapore has adopted one of the most liberal and transparent trade regimes in the world, with customs duties levied on only six tariff lines (stout, porter, beer, ale and samsu). Singapore proactively pursues free trade agreements (FTAs) to liberalize and facilitate trade and investment, and to strengthen alliances with strategic geopolitical partners. Singapore has concluded FTAs with ASEAN, Australia, the European Free Trade Association, Japan, Jordan, Korea, New Zealand, Panama, and the United States. Consequently, in 2006, Singapore’s merchandise exports amounted to US$289.3 billion, while its merchandise imports amounted to US$246.3 billion. Combining these two data, merchandise trade amounts to 405% of Singaporean GDP. Major export destinations in 2006 were Malaysia (13.1%), United States (9.9%), Hong Kong (10.1%), China (9.7%), Japan (5.5%), Thailand (4.2%), and South Korea (3.5%).

The Singapore government maintains rather conservative macroeconomic policies: (1) a close-to-balanced budget; (2) no external debt; and (3) an open capital account with a trade-weighted currency basket to set its currency exchange rate (i.e., a managed float). The Singapore government has large accumulated budget surpluses in the past few years — estimated in excess of US$70 billion — which it uses strategically to fund infrastructure projects and to promote key industrial sectors (e.g., electronics, chemicals, biomedical). The government has identified the country’s low fertility rate and aging society as a priority concern. In 2006, Singapore’s fertility rate was only 1.26 children, the third lowest in the world and well below the 2.1 needed to replace the population. To overcome this problem, the government has adopted a relatively open immigration policy.

b) Canada-Singapore Trade and Investment Relationship

Total bilateral trade between Canada and Singapore was $1.72 billion in 2006. Singapore is Canada’s second largest export market in Southeast Asia, seventh largest in Asia, and 24^th largest worldwide. In 2006, Canadian exports (including re-exports) to Singapore were at record highs, valued at $739.2 million, up 16% from 2005. Canada’s top exports to Singapore include machinery and mechanical appliances, electronic equipment, nickel, and optical and medical instruments. Singapore, in turn, exported $982.3 million to Canada, up just 1% from 2005. Canada’s top imports from Singapore include machinery, medical instruments, and organic chemical products.

Stocks of Canadian FDI in Singapore were $4 billion in 2006, ranking Singapore as the second largest destination of Canadian FDI in Asia (after Japan, not including Australia and counting China and Hong Kong separately). These investments represent about 12% of total Canadian FDI in Southeast Asia. In turn, Singapore FDI in Canada was $41 million in 2006, placing Singapore as the 37^th largest source of FDI in Canada.

There are an estimated 80 or more Canadian firms that have established operations in Singapore, including: Manulife, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, Bell Helicopter Canada, Pratt & Whitney Canada, Standard Aero, Celestica, Cognos, Humingbird, Mitel Networks, Nortel Networks, Telus, Canpotex, Bata and Four Seasons Hotels and Resorts. They are attracted to Singapore not only to sell their products in the domestic market, but also because of its proximity to other larger Asian markets. For many of these Canadian firms, Singapore is the gateway to the Asia-Pacific region.

Since 2001, Canada and Singapore have been engaged in free trade negotiations. Canadian and Singaporean officials have held seven rounds of negotiations, the most recent in March 2007. These negotiations have covered diverse topics such as trade in goods, trade in services, investment, government procurement, dispute settlement, and competition policy. Contentious issues related to labour and the environment were addressed in a parallel set of meetings.

c) Economic Opportunities and Challenges in Singapore

Although Singapore offers commercial opportunities in many areas, the main sectors of growth have been in aerospace and defence, agri-food, biotechnology and life sciences, environment, and information and communication technologies (ICT). For Canadian companies wishing to expand their operations into Asia, Singapore may also serve as a commercial hub and springboard into the region. Singapore’s English-speaking and skilled workforce, modern infrastructure, strong intellectual property (IP) protection, and network of FTAs together make Singapore an attractive location in which to invest in key knowledge-based and high-tech sectors.

In support of existing and hopefully expanding trade and investment relations between Canada and Singapore, Canada would do well to conclude its FTA negotiations with Singapore in a timely fashion. Such an agreement may also incidentally lead to greater trade between Canada and ASEAN. The Committee is of the opinion that, currently,

Singapore alone in Southeast Asia is sufficiently developed to commit to a comprehensive and enforceable set of free-trade obligations. Therefore, the Committee recommends:

Recommendation 16:

That the Government of Canada expedite its current negotiations of a free trade agreement with Singapore.

8. Vietnam

a) Economic Overview

Vietnam is a country of 85.3 million people divided amongst 54 ethnic groups, but with one dominant group known as the ‘Viet’ or ‘Kinh’ who account for more than 86% of the country’s population. More than 70% of this population is under the age of 30 (a consequence of its protracted war in the ’50s-60s and ’70s). Vietnam remains mostly a rural, agricultural society as urban centres only account for 20% of the population. Not unrelated to this economic structure, Vietnam is a relatively poor country with a GDP per capita estimated at US$723.9 in 2006.

Vietnam’s GDP was estimated at US$61.0 billion in 2006, growing by 8.2% over that recorded in 2005. Averaging a real GDP growth rate of more than 7% per year throughout the past decade, the Vietnamese economy is the fastest growing economy of ASEAN and the second fastest of Asia (behind China). With merchandise exports valued at US$39.8 billion and merchandise imports being US$44.9 billion in 2006, merchandise trade amounts to 139% of Vietnamese GDP. Additionally, Vietnam’s inflow of FDI was US$10.2 billion in 2006, brining total FDI inward stocks to US$65.6 billion. Therefore, the Vietnamese economy is becoming very open and integrated with the global economy, aided and abetted by free market reforms, the AFTA, the U.S.-Vietnam Bilateral Trade Agreement (BTA) and Vietnam’s recent accession to the WTO.

Table 2

	2002	2003	2004	2005	2006
Annual Real GDP Growth Rate	7.1%	7.3%	7.8%	8.4%	8.2%
Industrial Production Index (% change)	4.5%	15.5%	16.0%	17.2%	17.0%
Unemployment Rate (Urban)	6.0%	5.8%	5.6%	5.3%	4.4%

Source: International Monetary Fund, World Bank

In 1986, the Communist Party of Vietnam moved away from its planned economy model and implemented free market reforms, known more widely as Đổi Mới or ‘New Age.’ Although the political authority of the state remains uncontested, these reforms have included private ownership of farms and companies, deregulation, the adoption of a floating currency regime which included an initial devaluation of the Dong and the opening up of the domestic economy to foreign investment. The results have been spectacular:

·        more than 7% real GDP growth per year for most of the 1990s and every year in the 2000s (see Table 2);

·        poverty of 58% in 1993 has declined to 18% in 2007; and

·        the country’s external debt has fallen from 191% of gross national income (GNI) in 1993 to 33% in 2006.

Vietnam has clearly made significant economic progress. Land reform — that is, the de-collectivization of agricultural production — and the opening of the agricultural sector to market forces converted Vietnam from a country facing chronic food shortages in the early 1980s to the second-largest rice exporter in the world; other key Vietnamese exports are coffee, tea, rubber, and fish products.

The scope for private-sector participation in the manufacturing sector has also expanded, primarily through the introduction of laws giving legal recognition to private business and the reduction and elimination of subsidies provided to some state enterprises. The prices of most goods are now set by market forces, rather than controlled by the state. Consequently, industrial production accounted for 41.5% of GDP in 2006, up from 27.3% in 1985; and exports of manufactured goods, especially labour-intensive manufactures such as textiles and apparel and footwear, have also grown.

If there has been disappointment in these market reforms, it has been the government’s “equitization” initiative (i.e., transforming state enterprises into share holding companies and distributing a portion of the shares to management, workers and private foreign and domestic investors). State-owned enterprises in Vietnam are marked by low productivity and inefficiency, the result of their command-and-control resource allocation methods. Such a state of affairs cannot be corrected without new capital and operating procedures. However, to date, the government continues to maintain control of the largest and most important companies, and have not demonstrated any new market responsiveness in their resource allocation methods. Consequently, the state’s share of GDP of 38-39% has remained relatively constant since 2000. It appears that only the privatization of these state-owned enterprises, which would include the ceding of control to private investors, rather than simply “equitizing” their capital structure, along with the development of modern capital markets will be required for the improvement in these companies’ productivity/efficiency performances.

b) Canada-Vietnam Trading Relationship

Total bilateral trade between Canada and Vietnam was $864 million in 2006, up 13% from 2005 and more than six times that recorded in 1996. Canadian exports to Vietnam increased to $211.2 million in 2006 and are dominated by wheat: $75.2 million, accounting for more than one-third of total exports for the year. In value terms, exports of wheat are followed by exports of fertilizers (i.e., potash), machinery (i.e., boring and sinking tools and motor and engine parts), hides and skins, and fish and seafood. In turn, Vietnamese exports to Canada amounted to $652.8 million and consisted mainly of woven apparel, footwear, food products, and machinery.

Registered stocks of Canadian FDI in Vietnam were $414.7 million in 2006, placing Canada in 21^st position among the largest foreign investor countries. Major Canadian investors include Talisman, Manulife, and Asian Mineral Resources.

c) Economic Opportunities and Challenges in Vietnam

Vietnam holds many trade and investment opportunities for Canadian firms. Canadian business opportunities lie mainly in the natural resources sector, information and communications technologies, agriculture, and education. However, investors face many challenges in doing business in Vietnam, including corruption and an uncertain regulatory climate. To alleviate these concerns, the Vietnamese National Assembly has recently passed 29 pieces of legislation designed to improve the domestic business climate, including an anticorruption law and two commercial laws which came into effect on July 1, 2006.

The Committee believes that, given that Vietnam’s anticorruption laws are relatively new and have not been tested, further legal protections should be afforded Canadian investors. In support of existing and hopefully expanding trade and investment relations between Canada and Vietnam, Canada ought to consider entering negotiations of a FIPA. Therefore, the Committee recommends:

Recommendation 17:

That the Government of Canada negotiate a foreign investment protection and promotion agreement with Vietnam.