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1 Canada , China, and Rising A
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ByWendy Dobson,
RSMUT
Can ad a , China ,
and Rising As ia :
A Strate g ic Propo s al
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2 Canada , China, and Rising A
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Joint Statem ent
CCBC and CCCE
John P. Man ley
PCEO
CCCE
Peter Harder
PCCBC
China a nd t he Asia Pacific region
as a wh ole a re critically import-
ant to th e future prosperi ty of
Canad ians. For that reason we
are pleased to have sponsored this
stu dy by Wend y Dobson, Co-Direc-
tor of the In stitute for Intern ational
Business at th e University of To-
rontos Rotma n School of Man age -
ment . The purp ose of this study
wh ich is present ed in English,
French and Chinese is to inspire
new th inking and new ideas tha t
can help shape a long-term Can-
adian strateg y in Asia.
Dr. Dobson p resen ts a comp el-
l ing case for much deeper eng age-
ment in the region on the pa rt of
Canad ian businesses, govern-
ments and other stakeholders. She
lays out a comprehen sive roadm ap,
supp orted by an a nalyt ical frame-
w ork that includes h igh-level eco-
nomic analysis as well as regional
and country-specific findings . The
view s expressed in this study are
those of the aut hor.
Canadians have awakened to
Asias e conomic trans formation, but
the process is accelerating and w e
nee d to move quickly. The nu mer-
ous challenges that w e face are
outweighed b y tremendous oppor-
tu nities. All of us mu st w ork togethe r
to ensure th at Canada achieves its
poten tial as a Pacific nation.
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3 Canada , China, and Rising A
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Dr. Wen dy Dob so n
Dr. Wendy Dobson is Professor and
Co-director of the Institute for Inter-
national Business in t he University
of Torontos Rotm an School of Man -
ageme nt. She is a former Ass ociate
Deputy Minister of Finance in the
Canadian g overnment a nd a former
President of the C.D. Howe Insti-
tute, Canadas leading independ-
ent economic think tank an d a
non-executive director of Cana dian
companies in fina nce and energy.
Dobson ch airs the Pacific Trade a nd
Development (PAFTAD) network.
She is also a director of the Can -
adian Ditchley Found ation, Senior
Fellow at the Asia Pacific Founda-
tion an d mem ber of the Advisory
Committee of the Peterson Ins titute
of International Economics. Recent
w ritings include Differentiating
Canada: The Futu re of the Canad a-
US Relations hip, Will the Renm inb i
Become a World Cu rrency? a nd
The Contradiction in Chinas
Banking Reforms. Her most recen t
book Gravity Shift: How Asias New
Economic Powerhou ses Will Shap e
the 21st Centur y was a fin alist for
the Best Business Book of the Year
awa rd in 2010 wh ile the Mandarin
version Ya Zhou Xin Shi Li received
the an nual award for the best b ook
in Finance an d Economics from
Hexun.com.
Canad a China Busines s Counc il:
The Canad a China Business Council
(CCBC) is the cou ntrys Can ada -
China bilateral trade and investmen t
facilitator, catalyst an d a dvocate.
Founde d in 1978 as a p rivate, not-for-
profit business association, CCBC
provides unparalleled insight into
Sino-Canad ian trade and investment
issues a nd de velops connections
that ens ure its memb ers business
succes s. In addition to its focused
an d pract ical services, the Cou ncil is
also the voice of the Canad ian bu si-
ness community on issues a ffecting
Sino-Canadian trade and invest-
ment.
The Canad ian Council of Chief Execut ives
The Ca nad ian Council of Chief
Executives brings CEOs toget her
to sha pe p ub lic policy in the inter-
ests of a st ronger Canada a nd a
bette r world. Member CEOs and
entrepreneu rs represent all sectors
of the Ca nad ian economy. The
compa nies t hey lead collectively
adm inister C$4.5 trillion in a ssets ,
have an nua l revenues in excess of
C$850 billion, an d are res pon sible
for the va st m ajority of Canad a's
exports, investm ent, research and
development , and t raining.
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Contents Execut ive Sum mary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Overview and Introduc tion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Cana das Econom ic Relations :
The State o f Play . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A Clos er Look at Cana das Econ om ic
Relat ions hips w i th Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Asia in 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
China a nd India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Risks and Uncertaint ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Business Opportunit ies for Canadian Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Imp lication s of Asias Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Enhancing Cana das As ian Econo m ic Ties . . . . . . . . . . . . . . . . . . . . . . 25
Joining t he Trans -Pacific Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Deepen ing Canadas Econom ic Engag em ent w ith China . . . . . . . . . . . . . . . 26
A Propos al for a Canadian As ia Strateg y . . . . . . . . . . . . . . . . . . . . . . . . 28
Eleme nts of the Strateg y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Restore Canadas presence in the region . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Develop the Canada brand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Liberal ize trade and inve stm ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Create a China Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Enhance the Canadian bus iness presence . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Antic ipate the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Append ix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Append ix B : Thum bna il Sketc hes
of Major Econo m ies and Ins titutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The United Stat es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Indones ia, Malaysia , and Thai land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Asias Reg ional Inst i tut ions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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Executive
Summary
Canad a has a reputation in Asia
of show ing up there but n ot being
serious a bout es tablishing long-
term relationships. This wa s not
always the case. In the pa st, we b uilt
strong bilateral relationships with
Japan a nd China and contributed to
international aid programs in India,
Malaysia, and Th ailand . Canad a wa s
also a strong supp orter of the Ass o-
ciation of Southe as t Asian Nations in
the early years follow ing its founding
in 1967. Today, Canad a h as no major
comprehen sive trade deals or invest-
ment ag reements in the reg ionin-
stead, such initiatives have stalled
in the face of demands of spe cial
interest s or for concessions iden ti-
cal to those made to Ame ricans.
Our a bse nce from political-secu rity
forums matters deeply to traditional
trading partners such as Japa n and
South Korea. The pictu re is one of
an a d hoc approach, one that lacks a
strateg y toward de veloping both ties
w ith Asia and a Canada b rand.
Already, China h as replaced
Japa n as Ca nadas largest Asian
trading partner, and China an d
other Asians are very interested
in Canadas energy an d nat-
ural resources. Over the next
two d ecades, Asia wil l unde rgo
massive urbanization, and rapidly
expan ding m iddle classes w ill be
demanding wea lth managementand other fina ncial services, edu-
cation, clean er tech nology, an d en -
vironmenta l improvemen ts, all of
wh ich Canad ians do w ell. As such
dema nds grow, the regions g lobal
sup ply chain s w ill be come more
complex, and services, investment,
an d sa les by foreign a ffiliates w ill
be at the hea rt of t rading arrange -
ments. Canad a can not afford to be
left out.
Canadian b usinesses a re diversi-
fying trad e beyond t heir traditional
dependen ce on the US market,
respond ing to market forces rather
tha n to any st rateg ic policy shift.
As p olicy does shift, the diversifica-
tion should be viewed th rough a
Cana da-US lens . Can adas long-term
interests are served by the United
States developing its ow n broad
Asia strategy and by Chinese-US
cooperation, even as the y become
rivals. Asia also faces t he u nique
challenge of reconciling the asp ira-
tions and a mbitions of its three
giant e conomies, China , India, and
Japa n. It is in no one s interes t to
see Asia turn inwa rd and become
preoccupied w ith competition
among these three giants.
Canadians are beginn ing to
realize the s ignifica nce of Asias
rising econ omic and p olitical influ-
ence and the ne ed to re-engage
w ith the reg ion. Bold leaders hip is
now req uired to shape Cana das
respons e in a spirit commens urate
w ith the reg ions g rowing import-
ance. Canada needs a genera-
tional, multi-dimen sional economic
strategy to support and advanceits interest s. Two pillars of any
Canadian Asia strategy should be
a serious com mitmen t to political-
security issue s in the region and
engagement through state -to-state
relationships, wh ich provide the
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foun dat ion for comm ercial, polit-
ical, an d othe r relationsh ips. To
that end , Canad a should restore
its government s reg ional pres -
ence t hroug h high -level relation-
ship bu ilding. We shou ld d evelop a
Canada brand based on ambit ious
targets for trade and investm ent.
These ta rgets and relationsh ips
should be pursued on a n ongoing,
non-part isan ba sis supported by
a coordinated strategy a mong the
fede ral and provincial levels of
government , the private sector, and
other key s takeholders. We s hould
also be thinking of Canada as a n
Asian locationfor educa tion, non-
conventional energy, and even as
a headq uarte rs in the Americas for
Asian multinationals.
A pa rticular strateg y, or roadma p,
w ith respect to our relationship w ithChina should also be an integral part
of an e ffective Asia strateg yas
indeed, an effective Asia s trategy
and the linkages it would create
would be helpful in our dealing w ith
China. A China roadma p should ad-
dress mu tual interests: ours in trade
libera lization, investor an d inte llec-
tual property protections, sectoral
priorities, and Chinas in flows of
peop le, food se curity, ma rket access
to energy and n atural resources, and
the d evelopment of services such aseducation.
Central to a Canad ian Asia strat-
egy sh ould be t he active pu rsuit of
our interests through reg ional and
bilateral trade a nd investme nt lib-
eralization. In the long term , Can ada
should diversify its trade with China
by increasing its exports of know-
ledge -base d goods an d services
that China can not produce at this
time. At t he regiona l level, joining
the negotiations on a Tran s-Pacific
Partnership (TPP) would be the most
efficient w ay for Canada to deep en
its integration w ith other Asian
economies, but only so long as we
were w illing to p ut all issues on the
table, including s upply manage ment
and the protection of intellectual
proper ty. If not th rough TPP, the n
an aggressive strategy of bilateral or
other reg iona l economic frame w ork
agreemen ts w ill be necess ary.
Comm ercial priorities w ill also
reflect Canad as streng ths a nd
challenges. Canad ian natural
resource companies and firms such
as Manulife, BMO, Bombardier,
and SNC Lavalin already havedeveloped successful businesses
in Asia over man y years; we now
need to bu ild on these successes
and overcome th e major challenges
that confront sma ll and medium-
sized Canad ian enterprises as th ey
attempt to m ove be yond their small
domes tic ma rket and pa rticipate in
the regions supply chains. Finally,
Cana dian s should realize that, over
the next tw o decades, Asian p ro-
ducers w ill move into more d irect
competition w ith us as t hey developtheir capa bilities. To stay ahea d,
Canada w ill have to add ress its
lagging produ ctivity and other se lf-
inflicted wea knesses to ensure we
produce what Asians wa nt to buy.
Acknowledgement s: Special t hanks t o Walid Hejaziand Juan M a for assist ance wit h the empir ical
analysis and to Bar r y Norr is for his usual exper t
edit orial assist ance.
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Overview and
Introduction
The rise of Asia, whe re ha lf of
hum an ity lives, is tran sforming
the w orlds economic and g eo-
political lan ds cape. Six of the te n
largest cit ies a re there a nd, w ithin
twe nty years, so wil l be th ree of
the four largest economies: China
India, and Japa n. Even before the
recent g lobal fin an cial crisis, Asia
accounte d for more tha n a fifth of
the w orlds real gross d omest ic
product (GDP), but th at sh are ha s
now increased to one-quarter
and i s even higher when measured
by pu rchas ing pow er parity. Asias
economic dynamismparticularly
Chinas role as a lead ing w orld
traderhelped p ull the res t of the
world out of the 200809 reces-
sion.
The sp eed of Asias tran sforma-
t ion is unprecedented, and h as
been made possible by a w orld
w ith open m arkets in which Asian
economies h ave thrived a nd by
the h igh savings rates of Asian ci t -
izens. As well , Asian governments
have en couraged internat ional-
ization as a route to economic
development by exploiting spe-
cialization an d scale e fficiencies
w ith p olicies s uch as industrial
upg rading an d by a l lowing losers
to fail. The ge ograp hic proximity
of dynam ic t rading partn ers w ith
differing comparative advantageshas de epene d economic integ ra-
t ion w ithin t he reg ion. Interest ing-
ly, East Asias rise is ba sed most ly
on good s product ion w hile Ind ias
relies h eavily on ser vices, but even
India has ach ieved 8 to 9 percent
real growth rates as i t gradually
open s its economy.
At the sa me t ime, Asian
countr ies are highly diverse.
Unres olved hist orical mistrus t
still colours relationsh ips w ith
outside powers a nd w ith each
other. Indeed, ma ny Asian govern-
ments depend on par tnerships
w ith pow ers outside the region,
pa rticularly the United States, to
insure ag ainst reg ional conflicts
the a l liance betw een th e United
States and Japan h as provided the
political sta bility that h as b een a
key element in Eas t Asias eco -
nomic rise. State -to-sta te relation-
ships matter for economic success,
an d fledgling regiona l cooperative
inst i tut ions are h elping to ma nage
and chan nel regional economic
and political rivalries.
Canad a, a marginal part icipan t
in this tra ns formation, is faced on
the one hand w ith s low growth
in the United States , its main
economic and strateg ic partn er,
and th e concomitant growth in
importa nce of Asias m ajor econ-
omies. While economic grow th in
Japanwith which Canada h as
a cen tur y-long bilateral relation-
shiphas sta l led, total t rade
w ith the other large Asian econ-
omies h as b een g rowing rapidly.
Trade w ith Ch ina, in part icular,is driven largely by that cou ntrys
fast-growing market dema nd for
Canad as n atural resources to feed
its goods-producing industrial
machine.
Yet Ca nad as rep utat ion in A sia
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has decl ined in recent years w ith
our n eglect of bilatera l relation-
ships a nd regional inst i tut ions.
Canad ians act ive in the region
are often told th at some regard us
as u nrel iable. Canadian g overn-
ments and businesses , when they
turn up, make demands out of
proport ion to th eir importance and
then often fail to follow t hroug h.
Having investe d little in unde r-
stan ding Asian norms and conven-
t ions, Canadians often app ear to
be out of step w ith the reg ions
long-term th inking an d evolving
relat ionsh ips. Can ada has no free
trade agreement , now regarded
as a b arometer of the potent ial
of a relationsh ip, w ith any Asian
countryalthough bilateral ne-
gotiat ions w ith Singapore bega n
as long ag o as 2001. Canad ashistorically strong s upp ort for and
involvement w ith th e ten-membe r
Association of South eas t Asian
Nations (ASEAN) has declined
even as tha t body emerges as
the ma in inst itut ion prodding the
three giants to cooperate. Only in
the Asia Pacific Economic Cooper-
ation (APEC) forum h as Ca nad a
been act ive, but that forum ha s
been overtaken b y other inst i tu-
tions tha t are now driving Asias
strategic integ rat ion.Canad a need s a long-term Asia
strateg y. As a middle powe r and
latecomer to recog nizing As ias
poten tial, Can adas objectives
should be ambitious but realistic.
Our history and economic geog-
raphy are un iquely integrated
w ith and depende nt on the United
States, but that country, even as
it rema ins th e w orlds m ilitary
superp ower, wil l become a more
fruga l economic powe r, w ith
protect ionist pressures ema nat-
ing from high rates of st ructural
une mployment an d political ad-
minist rations preoccupied for at
least th e next decade w ith rebal-
ancing the economy. Canadians
cannot expe ct the United States to
continue to provide the econom ic
impetus w e have come to take
for grant ed . Economic integ ra-
tion in North A merica ha s largely
sta lled . Since its implementa tion
in 1994, the North A merican Free
Trade Agree ment (NAFTA) ha s
not kept up w ith major structu ral
change ssuch as th e rise of the
Internet, global supply chains,
and the s ervice economyor with
geop olitical shifts. Even as Asian
economies bu sily inte grate , in
North America security concerns
thicken borders, raising th e costs
of cross-border t ransact ions a nd
obstruct ing the movement of pro-
fess iona ls and te chn icians . Yet the
curren t US ad minist ration has lit-
t le interest in upg rading NAFTA;
instead, its strategic economicinterest lies in the Tran s-Pacific
Partn ersh ip (TPP), a comprehe n-
sive agreement covering trade in
goods and s ervices and invest-
ment , which many see as a clear
signal that China should not think
of Asia as its b ack yard.
Many Canad ians, however,
a re sangu ine about these t rends .
After all, Can ada e merge d from
the g loba l fina ncial crisis with a
sound fina ncial system , prudent
macroeconom ic policies a nd fis -cal posit ion, and strong dem and
for its na tura l resources des pite
a contract ion in investment a nd
net e xports in early 2009. Seen
another w ay, Canadas sou nd
economic base a ffords us flex-
ibility in ma king choices ab out
the futu re. Complacently continu-
ing our hea vy reliance on com-
modity exports and investments
w ill neither s usta in nor increase
future Canadian l iving stand ards.
Instead, we mus t modernize the
secondary sector and develop new
capa bilities in tertiary, know ledg e-
base d manu facturing and services
if we are to compete w ith eme r-
ging Asian p roducers. Canad a is
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also an ag ing societyby 2020,
the med ian age of Canad ians
w ill be 42, compa red w ith 37 for
American s and 32 for Mexican s.
As the impetus for grow th from
an e xpand ing lab our force dimin-
ishes, Canadians w ill have to aug-
ment th eir relian ce on extracting
natura l resources w ith innovation
and know ledge th at add value to
those natu ral resources and to the
production of services.
At the sa me time, because of his-
tory, proximity, and re lative sizes,
the United States w ill remain cen-
tral to Can adas e conomic futu re,
and Canadas Asia strateg y should
view t he region through a Canad a-
US lens. Indeed, Canadas relation-
ships w ith the United States and
Asia are complementar yin some
sectors, for example, our US supplychain partners export advanced
intermediate goods t hat might have
come from Cana da . North Americas
long-term interests w ill be s erved
by deep er economic and p olitical
integration w ith th e Asian e con-
omies. An inwa rd-looking, more
self-sufficient Asian bloc dominated
by th e rivalries of its t hree economic
giants w ould be in no ones interest.
Canad as Asia strateg y should
also be intergen erational, in the
sense of having su fficient sup portfrom th e m ain federa l political
part ies th at i ts priorit ies and broad
agend a continue to be pursued
regardless of the pa rty in power
in Ottawa , and i t should also take
into account the provinces eco-
nomic aspirations in Asia with in
the Canadian brand.
In this stu dy, I propose t he out-
lines of an Asia strate gy for Can-
ada. I begin by sum marizing the
sta te of play of Can ad as relation-
ships w ith the United States and
w ith Asias en gine e conomies
China, India, Indonesia, Japa n,
South Korea, Thailand , and Ma-
laysiawhich th e Asian Develop-
men t Ban k calls the Asia-7. I also
provide some compa risons w ith
Australia, wh ich has h ad a focused
Asia strateg y for a generation. I
then a na lyze sectoral pattern s of
trade w ith and direct investme nt in
the five largest Asian economies,
and draw out some implications forpolicy. Next, I tu rn to th e ta rget s
and plans that China a nd India, in
par ticular, have set for them selves
for the coming decade , and asse ss
the commercial opportun ities of
this agen da for Canada over the
next tw o decades. In the pen ultim-
ate s ection, I take a closer look at
options for major enha ncements
of Can ada s econ omic relationsh ip
w ith Asia, such a s joining the TPP
and entering into a comprehensive
economic agreeme nt with China.Fina lly, I propos e a st rateg ic frame -
work that looks out tow ard 2030,
and offer some closing t houghts .
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Canadas
Economic
Relat ion s : The
Stat e of Play
Despite the fund amenta l reshap -
ing of the interna tional economic
lands cape, the w orlds largest
t rading relat ionship remains that
be tween Can ada and the Uni ted
States (Figu re 1). Indicative of
the recent sea chan ge, however,
is that China is now Canad as
second-largest t rading pa rtner,
though Cana da-China t rade st i l l
amounts to just 10 percent of Can-
adas t rade w ith th e United States.
Canad as next tw o most important
Asian t rading partn ers are Japa n
and South Korea, with India and
Indonesia lagg ing far behind. That
said, in the past five years Can-
adas e xports to China, India, and
Indonesia have grow n at double-
digi t rates w hile those to the
United States and the Eu ropean
Union have g rown more slowly or
even sh run k (see Ta ble 1). Flow s of
immigrants and s tudents a re a lso
significant , with China topping
the l ist of num bers of immigrants,
followe d by India, Japa n, and
South Korea. More Cana dian s live
in Hong Kong tha n anyw here else
in Asia. Measu red b y stocks of for-
eign d irect investmen t (FDI), how-
ever, the As ian economies rema in
well dow n the l ist as b oth dest ina-
t ions and sou rces, w ith both Japan
and China trailing Brazils C $15
billion s tock of FDI in 20 09 (Ap-pen dix Table A-2), although t he
use of tax havens, w hich account
for a s ixth of Cana das $593 billion
tota l outw ard s tock in 2009, com-
plicate de stina tions of Can adas
outward investment .
For Cana da, howe ver, wh at
s tand s out in s ke tches of the dr iv-
ers of its reg ional an d bi lateral
relationships (see Appendix B) is
the a bsence of an overa l l s t ra tegy
tha t recogn izes As ias import-
ance to Cana das economic futu re.
Trade neg otiat ions are ad h oc.
Consu ltat ions with private sector
groups and other levels of govern-
ment a re ad h oc . And a robust
syste m of nat ional consu ltat ions
focused on th e nat ional interes t
no longer exists , leaving th ese a d
hoc a rrangements vulnerable to
captu re or delay by spe cial inter-
ests . Accordingly, Can adas repu-
ta t ion in Asia has b een da maged
by s tart -stop bi lateral init iat ives
and by wh at appears to others
to be an exa ggerate d view of i ts
own importance . Adding to the
lack of a s trateg y th at rea l ist ical ly
assess es the importance of these
major economies to Canad a is the
scarci ty of an alyt ic and neg otiat-
ing resources. Instea d, the feel ing
seems to be th a t i t is point less to
al locate resources th at are thin
on the ground to pursue a par t ia l
agree ment w ith, say, Ind ia, a
count ry tha t , to Canad ians , seemsto lag far beh ind China in eco-
nomic sign ificance.
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11 Canada , China, and Rising A
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Figure 1. Total US Trade with
M ajor Trading Par tners
and Selected Asian Economies,
2000-2010
700
600
500
400
300
200
100
0
Canada
China
Japan
South Korea
India
Singapore
Hong Kong
Australia
Indonesia
Viet Nam
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
60
50
40
30
20
10
0
India
Singapore
Hong Kong
Australia
Indonesia
Viet Nam
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Instr uctive here is Austra lias strat -
egy t oward Asia. Indeed , Australia
ha s developed a n influen tial role in
the region far out of proportion to its
economic size, wh ich is a th ird sma ll-
er than Can adas. More than tw enty
years ago, the Australian govern-
ment initiated a m ajor economic an d
political study of northea st Asias
economic prospects, wh ich pa inted a
clear p icture of the reg ions p otentia l
an d mad e far-reaching policy recom-
mendat ions that were taken up at
the h ighes t level and h ave been su s-
tained by su ccessive governments
of both m ajor pa rties. An e xplicit
assumption in Australias strategy is
that its relationships w ith the United
States, with w hich it ha s a military
alliance, and the Asian economies
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12 Canada , China, and Rising A
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are complementary. Australian gov-
ernments also have invested heavily
in maintaining personal relation-
ships at the h ighest level, as Prime
Minister Gillard d emonstrated whe n
she visited Japa ns prime m inister
following the recent de vastating
earthquake and tsunami. Australia
has also sought to improve its dip-
lomatic, edu cational, an d rese arch
capabilities w ith respect to the major
Asian economiesone target is
tha t, by 2020, 12 percent of Austral-
ian school leavers sh ould be a ble to
spea k an Asian languag e. Austra lia
has also completed or is negotiating
bilateral free trade a greements w ith
ASEAN as a w hole, w ith each of its
more advanced mem bers, and with
Jap an , South Korea, and Ch ina. It
wa s former Australian prime min-
ister Kevin Rudd wh o advanced the
Big Idea of an Asia-Pacific Com-
mun ity, wh ich led to Russia and the
United States joining the East Asian
Summit.
Table 1. Canadas Diversifying
Trade: Goods and Services
Trade by Major Par tner,
2008-2010
PARTNER
Exports ImportsTrade
Balance
Average
Value
(C$ billions)
Average
Share
(%)
Average
Annual Growth
from2006
(%)
Average
Value
(C$ billions)
Average
Share
(%)
Average
Annual Growth
from2006
(%)
Average
Amount
(C$ billions)
WORLD 469.5 100.0 1.5 496.9 100.0 0.7 27.44
UNITED
STATES 336.3 71.6 3.0 255.8 51.5 0.7 80.45
EUROPEAN
UNION 47.4 10.2 2.4 62.9 12.7 0.2 15.50
CHINA 11.6 2.1 10.3 44.2 8.4 7.9 32.56
JAPAN 10.4 2.2 1.0 15.2 3.0 2.6 4.74
INDIA 2.8 0.5 12.7 2.8 0.5 8.1 0.05
INDONESIA 1.6 0.3 23.7 1.2 0.2 4.5 0.45
SOUTH
KOREA 4.6 0.8 4.8 6.4 1.2 1.6 1.85
REST OF
WORLD 62.6 11.3 11.0 106.4 20.1 6.4 43.80
Source:Canada, Indust ry Canada, Trade Data Online;
available at http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.
Instru ctive h ere is Aus tralias s trat-
egy toward Asia. Indeed, Australia
has developed a n influent ial role in
the region far out of proportion t o
its economic size, wh ich is a th ird
sma ller tha n Can adas. More than
twent y years ago, the Australian
governme nt initiated a m ajor eco-
nomic and political stu dy of north-
eas t Asias economic prospects ,
wh ich pa inted a clear picture of the
regions p otential and mad e far-reaching p olicy recommend ations
that were taken up at the highest
level and have been s ustained b y
success ive governme nts of both
major pa rties. An explicit ass ump -
tion in Aus tralias s trateg y is that its
relationships w ith the United States,
w ith wh ich it has a military a lli-
ance, and th e Asian economies a re
complement ary. Aust ralian govern-
ments a lso have invested h eavily
in mainta ining pers onal relation-
sh ips at t he h ighest level, as Prime
Minister Gillard demonstrated when
she visited Japa ns prime minister
follow ing the recen t devas tating
earthq uake and tsu nam i. Australia
ha s also sought to improve its d ip-lomatic, educationa l, and resea rch
capabilities w ith resp ect to the ma-
jor Asian economies one ta rget is
tha t, by 2020, 12 percent of Austra l-
ian school leavers sh ould be a ble to
spea k an Asian lang uage. Australia
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13 Canada , China, and Rising A
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has also completed or is neg otiating
bilateral free trade ag reemen ts w ith
ASEAN as a w hole, w ith each of its
more advanced mem bers, and w ith
Japa n, South Korea, an d China . It
wa s former Australian prime min-
ister Kevin Rudd w ho advan ced the
Big Idea of an As ia-Pacific Com-
mun ity, which led to Russia an d the
United States joining th e East Asian
Summit.
The Australian example thus
provides a mode l for Canada to
consider if it is serious a bout reviv-
ing its pa rticipat ion and visibility
in Asia. Before considering our
options, how ever, I first wa nt to
ta ke a closer look at our exist ing
relationsh ips w ith the major Asia
economies and to place them in the
context of wh at the reg ion might
look like in 20 30.
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14 Canada , China, and Rising A
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A Clos er Look
at Can ad as
Economic
Relationships
w ith Asia
In the pas t decade, Canad as trade
has been diversifying be yond
its historical focus on t he United
States and Europe and toward
Asia, wh ich is timely cons idering
that, in 2006, China overtook
Canad a as t he largest sou rce of US
imports. As Table 2, show s, be-
twe en 2000 a nd 2010, Asias sh are
of goods exp orts to Canada rose by
nearly three a nd a ha lf percentage
points and imports by more tha n
six points. Similar grow th took
place in serv ices trade (Tab le 3).
In both cases, much of the g rowth
took place in trade w ith China
trade w ith Japa n largely stagn ated
wh ile tha t w ith India grew from
a very sma ll bas e. In contrast , the
United States share of both g oods
and services exports declined over
the de cade, a trend that accelerated
during th e recent global financial
crisis, when Can adas trade w ith
the United States dropped off more
sharply than d id i ts t rade w ith a ny
Asian p artners; t rade with the
United States recovered s mar tly in
2010, but at a slower pace th an t hat
w ith China (Figure 2).
Table 2. Canadas M erchandise
Trade with the United States
and Selected Asian Economies,
20 00 10
2000 2005 2010Annual Growth
of Share
Share of Exports (%)
CHINA 0.89 1.65 3.31 14.04
JAPAN 2.25 2.10 2.30 0.22
SOUTH KOREA 0.57 0.65 0.93 5.02
INDIA 0.14 0.25 0.52 14.02
HONGKONG 0.35 0.33 0.48 3.21
INDONESIA 0.17 0.16 0.27 4.73
SUBTOTAL 4.36 5.14 7.81 6.00
UNITED STATES 86.95 83.82 74.89 1.48
Share of Imports (%)
CHINA 3.16 7.75 11.02 13.31
JAPAN 4.65 3.89 3.33 3.28
SOUTH KOREA 1.48 1.41 1.52 0.27
INDIA 0.35 0.47 0.53 4.24
INDONESIA 0.25 0.25 0.31 2.17
HONGKONG 0.41 0.15 0.09 14.07
SUBTOTAL 10.30 13.91 16.81 5.02
UNITED STATES 64.33 56.49 50.37 2.42
Source:Canada, Indust ry Canada, Trade Data Online; available at
http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.
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15 Canada , China, and Rising A
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2000 2005 2006 2007 2008 2009 2010 AnnualGrowth
(%)Exports (C$ millions)
WORLD 59,718 67,599 68,386 69,804 72,113 67,144 70,090 1.61
UNITED
STATES 36,601 38,260 36,781 38,102 38,693 35,386 37,208 0.16
JAPAN 1,869 1,535 1,565 1,296 1,266 1,049 1,244 3.99
CHINA 738 1,019 1,079 1,075 1,154 n.a. n.a. 5.75
HONG
KONG 756 996 1,189 1,000 1,039 n.a. n.a. 4.05
INDIA 249 306 335 308 355 n.a. n.a. 4.53
INDONESIA 202 172 148 169 149 n.a. n.a. 3.73SOUTH
KOREA 568 657 735 783 757 n.a. n.a. 3.66
SINGA-
PORE 292 376 411 387 379 n.a. n.a. 3.31
Imports (C$ millions) (%)WORLD 65,500 79,654 82,521 88,593 94,432 89,807 93,398 3.61
UNITED
STATES 41,686 46,392 46,694 50,278 52,702 49,943 52,544 2.34
JAPAN 2,068 2,461 2,145 1,846 1,637 1,404 1,726 1.79
CHINA 442 867 1,170 1,258 1,558 n.a. n.a. 17.06
HONG
KONG 967 1,706 2,010 2,183 2,779 n.a. n.a. 14.11
INDIA 168 302 352 369 589 n.a. n.a. 16.98
INDONESIA
84 81 79 87 87 n.a. n.a.
0.44
SOUTH
KOREA 303 334 379 403 431 n.a. n.a. 4.50
SINGA-
PORE 481 945 1,047 1,169 1,169 n.a. n.a. 11.14
n.a.: not available.
Source:Canada, Indust ry Canada, Trade Data Online; available at
http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.
Table 3. Canadas Services
Trade with the United States
and Selected Asian Economies,
20 00 10
Figure 2. Total Canadian Trade
with M ajor Trading Par tners
and Selected Asian Economies,
2000-2010
600
500
400
300
200
100
0
United States
Hong Kong
India
SingaporeChina
Indonesia
Japan
South Korea
VietnamAustralia
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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16 Canada , China, and Rising A
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Figure 2 , Cont inued 60
50
40
30
20
10
0
Hong Kong
India
Singapore
China
Indonesia
Japan
South Korea
Vietnam
Australia
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Since trad e a nd F DI are largelymarket driven how does th is
performance accord w ith Canad as
evolving comparative advantage
and competit iveness ? In broad
term s, a count rys competitiveness
in merchandise t rade is evaluated
by comparing i ts exports in an
industry to a part icular dest inat ion
w ith its total exports in that indus-
try to th e w orld at large . (Unfortu-
nate ly, a similar breakdow n is not
available for services trade .) When
exports to a part icular dest inat ionexceed the global sha re, the mea s-
ureknow n as revealed compara-
tive ad vant age (RCA)indicates
the exporting countrys competi-
t iveness in that m arket . Table 4
compare s the relative compe titive-
ness of Canadian indus tries in
foreign ma rketsinclud ing, by
inference, the Chinese marketin
two w ays: panel A ran ks those
prominent in world m arkets by
trade sh ares (colum n 3), wh ile
pan el B ranks t hem b y their prom-inence in Ca nad as tota l trade (col-
um n 4). Notab ly, those indus tries
prominent in world m arkets (panel
A) accou nt for relatively sma ll
sh ares of Can adas trade , reflect-
ing the continued dominance of
the United States as a dest inat ion
for Canadian e xports.
The ta ble also shows Ch inas
relative compet itivene ss in w orld
markets, meas ured b y its RCA by
indu str y (pane l A, colum n 6). For
Canadians, the key, and p erhapssurp rising, finding is that Ch inas
comparative advan tage is negative
in all industries in wh ich Canad a
is a world lead er. In pa nel B w e se e
that , with the exceptions of ma-
chinery and e lectrical eq uipment,
Chin a is relatively les s comp etitive
than Canada in the other indus-
tries. Can ada is a lso revealed to be
competitive in most of these indus-
tries in the Ch inese market (panel
A, colum ns 7 and 8, and p anel B).
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Table 4 . Canadas Comparat ive
Advantage by Industry
Industry (1)
Industrys Export
Share Industrys RCAin:
RCAof
Industry
(2)
as % of
World
Exports
(3)
as % of
Canadian
Exports
(4)
Trend of
Industrys
RCAver-
sus World
(5)
Chinas
RCAin
Industry
(6)
Trend of
Chinas
RCAin
Industry
(7)
China
(8)
South
Korea
(9)
India
(10)
A. Ranked by Share of World Exports
75 NICKEL 2.1 16 1 0.00 0.9 + + + +
47 PULP 3.1 15 1 0.04 2.4 0 + + +31 FERTILIZERS 2.6 10 1 0.00 1.1 + + +
79 ZINC 0.6 10
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18 Canada , China, and Rising A
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such as construct ion and other
services sugges t Cana dians are
finding that competit ion is intens i-
fying an d that the Chinese govern-
ment is according preferences to
Chinese enterprises.
Several observations are su g-
gested by these find ings. Canad as
competitiveness in natu ral resou r-
ces (pa nel A, colum n 5) is relatively
static; though it is w orsening in
pulp and paper and w ood products,
these industries remain competitive
in Chin a (column 7). It is trou bling,
howe ver, that Cana das competitive-
ness in veh icles an d aircraft appears
to be d eclining (colum ns 5 and 7).
Trade is largely complement ary
but Canada buys tw ice as much
manu factures from China a s China
buys in nat ura l resources from us;
our trade de ficit grew by nea rly 50percent betwee n 2005 and 2010.
Cana da could close th is gap by sell-
ing more natural resources to China.
In the longer term, how ever, the
solution should be to diversify bilat-
eral trade, w ith Can ada exporting
more knowledge-based goods a nd
services that China can not produce,
and b y restoring Canad as declin-
ing advantages in industries s uch
as veh icles a nd a ircraft. Now m ight
be an opportune time for the two
countries to liberalize bilateral tradesince in the future both count ries
wou ld ben efit from a framew ork
that facilitates s pecialization and
intra-industry trade.
Table 4 also reveals that Can -
ada can compe te in South Korea in
most of the industries in w hich it
is a w orld leade r. But some of the
industries a ccounting for a large
sha re of Can adas tota l trade wh ich
are competitive in Ch ina are not
compet itive in South Korea. One
explanation for these p attern s is
sugg este d in Table 5 wh ich ranks
Canad as te n m ost competitive in-
dus tries by RCA in the five larges t
Asian e conomies plus Hong Kong.
None of the te n th at are competi-
tive in South Korea is a ma nu fac-
turer. This is not s urprising g iven
South Koreas su ccess in global
supp ly chains in goods ma nufac-
turing. Instead, natu ral resources,
foodstu ffs, and inputs t o early
stag es of South Korean produc-
tion p rocesses account for most of
Canad as top ten exports to th at
country. In the other economies,
too, Canad a tend s to be more
compe titive in activities furth er
down the value chain, rather than
in manu facturing (shown in bold
type).
Wha t are th e policy implications
of this picture for Canada? First,
our competitiveness in na turalresources implies th at we should
anticipate g rowing Asian interest
in investing in this country in order
to enh ance s upply. Second, the
picture is confined t o merchandise
trade . Since reg iona l produc tion
netw orks are a major featu re of
economic flows into and w ithin
the Asian reg ion, policy wou ld b e
much b etter informed if additional
meas ures w ere available as to how
Canadians a re doing w ithin these
regional networks; th ese me as-ures w ould include m ore detail
on outw ard FDI flows w hich are
integral to the services an d sales
abroad by foreign a ffiliates of Can-
adian compa nies. Third, although
Canadas trade diversification
beyond th e United States is driven
primarily by Asian m arket deman d,
the size of our US trade continue s
to sh ape our competitive profile in
key non-commodity indust ries. Are
we ade qu ately leveraging these
strengths in Asian ma rkets and
supp ly cha ins?
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Table 5. Top Ten Industries
in which Canada Has a Strong
Positive RCA in the United
Stat es and Major Asian
Economies, 2010
Rank
United
States China Hong Kong India Indonesia Japan
South
Korea
1
mineral
fuels pulp nickel vegetables fertilizer oil seeds pulp
2 vehicles
ores, slag
and ash meat fertilizer pulp meat fertilizer
3 paper
animal,
vegetable
oils fish pulp cereals wood aluminum
4 aluminum oil seeds fursiron and
steelmachinery/
nuclear pulp wood
5 plastics wood oil seeds
salt,
sulphur,
stone,
cement meat cereals cereals
6 wood nickel
pharma-
ceutical
products
optical
apparatus aircraft fertilizer
ores, slag
and ash
7 fertilizer
mineral
fuels paper
pearls,
precious
stones
salt, sul-
phur, stone,
cement aircraft nickel
8
commod-
ities (not
elsewhere
specified)
organic
chemicals
animal,
vegetable
oils
textiles/
apparel rubber prod
ores, slag
and ash meat
9 pulp copper plastics aircraft fish fish oils
10
iron and
steel
machinery/
nuclear wood nickel vegetables
milling
products furs
Note:Manufacturing industries are shown in bold type; data for Hong Kong and India are for 2009.
Source:Authors calculations, from Canada, Industry Canada, Trade Data Online; available at
htt p://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; a ccessed May 21, 2011.
Fina lly, since a m ajor goal of the
Asian economies is to move up the
technology ladder, Canada h as a
strategic rationale for negotiating
bilateral and reg iona l trade ag ree-
ments w ith them sooner rather
tha n later. In the a bsen ce of such
arrang ements , Canad as relative
lack of compet itivenes s in s elling
man ufactured g oods to South Korea
could foresh adow the fate of our
value-adde d e xports t o, say, India,
as tha t count rys trade pattern s
increasingly resem ble those of
South Korea in Asias continu ing
economic tran sformation.
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Asia in 2030 Asia is on th e move: this, many inthe reg ion claim, is the Asian Cen-
tury. By 2030, estimate s th e Asian
Developme nt Ban k, Asias m iddle
class es w ill num ber more than 2
billion pe ople, and trillions of dol-
lars w ill have to be invested in t he
physical and s ocial infrast ructure
theyand th e aging populations
of countries such as Japa n and
Chinaw ill dema nd. At the sa me
time Asians are facing e ducation
and innovation dilemm as: w hile
large investm ents in e ducation
are being made in both China and
India, these are p roducing millions
of college gradu ates alongside
serious s hortages of techn ical and
scientific s kills.
Asia is also rapidly urba nizing:
by 2020, it w ill conta in 13 of the
w orlds 25 large st me tropolises,
each w ith more th an ten m illion
people. And Asia is integrating,
as major investmen ts are m ade in
trans portation routes to facilitate
intra-regional trade. Asian enter-
prises are also moving up th e rank-
ings of the w orlds largest firm s a nd
fina ncial ins titutions: in 2010, 23 of
the t op 100 of the Fortune Global
500 by total revenues w ere Asian,
11 from Japa n, 6 from China , and 3
from South Korea. Enterp rises s uch
as Samsu ng Electronics, Toyota,
Honda, Hyund ai, Tata Motors,CITIC, Cosco, an d th e na tional oil
companies of China a nd India are
among the worlds ma jor outwa rd
investors. Indee d, the single larges t
determ inant of rising w orld p rices
for oil and oth er nat ural resources
is incrementa l Asian dema nd.
As Asians increasingly think
Asian, two things are happ ening.
First, Asians a re creating th eir ow n
regiona l institut ions in se curity,
finan ce, and trade and inviting the
United States t o join. For years th e
Asia-7 followe d exp ort-led develop-
ment models that focused on fina l
markets in the advanced industrial
countries. India and its dynamic ser-
vice sectors as ide, most East Asians
pa rticipat e in regional production
netw orks organized around Ch inese
assem bly platforms. These regional
netw orks proved to be a doub le-
edged sw ord in the global financial
crisis when export dema nd in final
goods ma rkets evaporated, a shock
that cascaded th rough Asian sup ply
chains. The w akeup call prompted
East Asian governments to shift
their growth strategies toward
regional and d omestic dema ndto
a hea vier relian ce on other sou rces
of grow th, such as s ervices and
improved p roductivity, to rep lace
low-cost m anu facturing.
Second, Asian s are coming
to terms w ith slower economic
growth. Unthinkable before the
globa l crisis, slowe r grow th n ow
seem s inevitable as social and
political tensions rise over the side
effects of rapid industrialization, ris-
ing income inequ ality, and environ-mental de gradation. Sustaining
economic grow th th rough produc-
tivity increases a nd inn ovation,
which require institutional change,
is proving a challeng e. In th e de c-
ade ahead , we can expect grow ing
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21 Canada , China, and Rising A
A Strateg ic Prop
pressures on Asian policymakers
to improve income distribut ion a nd
services, particularly those t hat
fulfill middle-class aspirations for
housing , hea lth, education, fina ncial
secu rity, and en vironme nta l qu ality.
China a nd India What w ill mas sively populated
China a nd Ind ia look like by 2030?
In the shor t t e rm, both a re s t rug-
gl ing w ith w idespread corrup-
t ion and persistent inflat ionary
pressures . Beyond tha t , grow th
in the five-year economic plans
of both countries (coincidently
the t we lfth for each) is heade d in
opposi te d irect ions. Ch inas p lan
for 201115 is to mod erat e th e
economys g rowth ra te and under-
take a m ajor rest ructu ring, while
Indias p lan for 201217 aims for
910 percent economic grow th to
generate jobs and promote social
inclusiveness . Both w ill undoub t-edly be preoccupied w ith th ese
goals far into the future.
China intends to rebalance its
economy to rely more on g rowt h in
household consumption a nd less
on heavy investment in industrial
export-oriente d production. It is
also shifting production and de -
velopment to the inland reg ions. It
intends to boost cons ump tion by, for
example, increasing the minimum
wage , spending more on the social
safety net and s ocial housing, andpus hing for even more urban iza-
tionCh inese cities are expecte d
to grow by 300 m illion pe ople over
the ne xt 30 years. China is also
encouraging g reater private sector
par ticipation in t he labour-intens ive
service industries through dereg u-
lation a nd m aking fina ncing more
accessible for small and med ium-
sized business. Innovation and
productivity grow th are a lso pa rt of
Chinas reba lancing strate gy, with
the ta rgeting of seven emerging
pillar indu stries, three of them
green: renew able energy sources,
energy conservation, new energy
(electric cars), biotech nology, new
materials, advanced manu facturing
(including high-speed trains and
aerospace), and new-generation
information te chnology. The plan
calls for energy prices to b e de ter-
mined m ore by market forces than
by governme nt fiat, and for carbon
emissions to b e ta xed. The large
industrial state-owned enterprises
w ill pay higher dividend s to the ir
central government owners, and a
planned value-added ta x w ill cede
more tax room to local governments ,
wh ich h ave had to rely heavily on
revenues from land sales.
In contras t, Inidias five yea r plan
is more indicative an d a spirational
becaus e of the d iffused nat ure ofpow er in Indias federal structu re.
The five year plan p laces g reater
emphasis than in the past on
greater market efficiency, innova-
tion, and en ergyin the latter tw o
areas, India is a lready a leader in
the developing w orld. India is a lso
focusing on e ducation, transp or-
tation, and urba nizationcities
are to retain a portion of the new
national value-added tax to h elp
with their finances. Indias political
diversity, how ever, makes it un cer-tain wheth er the country can reach
its economic potential without
determ ined efforts by the dyna mic
private se ctor. Some stat es, like Gu-
jarat, approach developed -countr y
levels, wh ile p opulous northea stern
states such as Uttar Pradesh and
Biha r lag far beh ind. Product ma r-
ket reforms have not been m atched
by labour m arket reforms. Over the
next tw enty years, India w ill have
to a bs orb 250 m illion 15-to-24-year-
olds int o the lab our forceyet 90
percent of Indian em ployment is
cas ua l, devoid of ben efits or skills
training. Opposition from pow erful
interest groups is slowing th e pace
of domestic reform and ham pering
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22 Canada , China, and Rising A
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Slow er grow th: As midd le-class
consumption assumes greater
importance relative to investment
grow th in the more advanced East
Asian economies, slower g rowth
w ill mean more intense competi-tion among foreign exp orters of
natura l resources, l ike Canad a,
and more production opportu nit ies
in the developing economies such
as Bangladesh , Sri Lan ka, and
Vietna m to wh ich labou r-intens ive
manu facturing is sh ift ing.
Declining saving rates: On e
outcome of aging and rising
consumption among Asian popula-
t ionsw ith increasing deman ds
for residential, infrastru ctu re, and
productive investmentis declin-
ing rates of househ old saving . A
recent McKins ey forecas t of the
supply of and dema nd for invest-
ment in physical capital in As ia
out to 2030 predicts a g rowing
short fall of the su pply of capital
and higher capital costs.
The middle-income trap: Rising
expect ations by those asp iring to
midd le incomes cou ld lead to ris-
ing p olitical tensions as Chinese
and Indian governments struggle,
without the necessary institutionalstructures, to address regional
and income inequ alities. Some
worry that pus hb ack from pow er-
ful veste d interests w ill cause
growth rates to slow a nd p er capita
incomes to stagnate, known a s the
middle-income trap, that w ill be
difficult to es cape . Indias p olit-
ical leaders, even wh en h olding a
pa rliam ent ary m ajority, have failed
to carry out targete d job-creation
reforms, and the Ind ian pa rlia-
ment is p aralyzed b y corruption
scand als. China faces persistent
inflation, while strong political
pressu res oppose solutions such
as excha nge rate ap preciation. The
country also faces the ch allenge of
a major leadership transition over
the next few years.
Risks and Uncertainties
Business Opportunit ies
for Can adia n Firm s
Despite the cha l lenges China an d
India face in the years ahead , their
economic plans offer opport un ities
for Canadian b usinesses , part icu-larly in area s such a s ag ricultu re,
natura l resource commodit ies,
energy, and t he e nvironment (in-
clud ing so-called clean te chnology
and greener u rbanizat ion), and in
services such a s hea lth care, edu-
cat ion, entertainment , and t ourism
for which dema nd by midd le-class
Chinese an d Indians is rising.
The env ironment: Chinas
ques t for cleaner en ergy ha s
moved beyond am bit ious plans
for nuclear g enerat ion to a des ire
to pursue new sources such as
w ind, solar, biomass , coal-bed
metha ne, and sh ale gas. As we ll,
Chinas commitmen t to redu ce
carbon emissions h as t riggered a
w ave of activity in clean te chnolo-
gies, including smart grids, carbon
capture and storage, and bat tery
storage t ech nologies. These pr ior-ities w ill create m ajor opportu n-
i t ies for Canad ian firms in energy
and other consu lt ing services th at
ass ist, for example, in the d esign
and expan sion of conservat ion
activities.
Health care: By 2030, China
is expe cted to have 300 m illion
people of ret i rement ag e, and they
w ill be dema nding bet ter heal th
care services th an a re provided to-
dayCh inas rising midd le class es
are a lready creat ing dema nd for
high-end med ical and hea lth care
servicesopen ing opp ortunit ies
for foreign p art nersh ips in medical
research and med ical equ ipment
production.
libera lization of invest men t and
trade, both of wh ich are need ed to
mainta in Indias grow th momen-
tum in the years ahead.
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23 Canada , China, and Rising A
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Urban services: By 2030, more
tha n a b illion Chinese and 600 mil-
lion Ind ians w ill live in cities, ma k-
ing the qu ality of urban life a major
issue in b oth countries. Both h ave
am bitious plans to increase energ y
efficiency, mas s t ransit infrastruc-
ture, and water t reatment and
sa nitat ion facilities , althou gh Ind ia
faces m ajor challenge s in th ese
areas, p articularly in its bu rgeoning
second a nd t hird-ran k cities.
Services for the m iddle classes :
Fast-growing m iddle classe s in
both countries are dema nding
bet ter services not only in health
care, as noted, but a lso in areas
such as h igher educat ion and
fina ncial services. Affluent Ch i-
nese a re demand ing access to
finan cial inst i tut ions to m ana ge
their crossborder t ransact ions,wh ile th e rising internat ional
presence of Chinese compan ies
is increasing dema nd for under-
w riters and investme nt banking
services. Chin as cap ital market is
much less developed tha n Indias,
except in th e issu ing of corpor-
ate bond s, wh ile privately own ed
corporations in both countries st ill
face heavy restrictions on bond
financing.
Tourism: The increasing a fflu-
ence of middle-class Chinese andIndians is expected to boost their
dem an d for foreign travel signifi-
cantly. China has a lready gra nted
Canad a approved destinat ion,
opening ne w opp ortun ities for Can-
adian travel services as m ore Chi-
nese nationals visit th is country.
New technologies: Chinas
targe ts for biotechnology and
na notech nology as area s for break-
throughs in b asic research signal
a larger s et of educational oppor-
tun ities. The state has planne d a
tota l inves tme nt of US $20 billion
in biotechnology by 2030, wh ile
nanotechnology received some
of the US$50 billion allocated t o
research and development fund-
ing in the 2008 stimulus package.
Many of these resources have b een
allocated t o the large un iversities
and research centres, but smaller
centres have also benefited a nd it is
there that u niversities a nd firms are
more open to foreign collaboration
and to edu cationa l opportu nities
encouraged by local governments.
Outflow s of Chinese capital: As
domestic growth slows, both state -
owne d and and non-state enter-
prises w ill seek to expand a broad.Profitable state-owne d enterprises
w ill wa nt access to natu ral resource
assets, new m arkets, brands, and
tech nologies. Desp ite the h igh
profile of Chines e FDI in the United
States, its total is still less tha n
th at of South Korea, Brazil, or Ind ia.
That, how ever, w ill chan ge. The
New York-based Rhodium Group
est imates th at, if Chinas outw ard
investmen ts w ere to follow a trajec-
tory similar to Japa ns in t he 1970s
and 1980s, Chinese investors wouldinves t US$12 trillion ab road in th e
next decade, w ith much of it headed
for the United States. Canad a cur-
rently receives 75 p ercent as much
Chin es e F DI ($9 billion in 2010) as
the United Stat es ($12 billion); w ere
tha t ratio to continue, hund reds of
billions of dollars of Chinese invest-
ments could be h eaded for Canada .
The Imp lication s
of As ias Rise
By 2030 Asia could be at th e cen-
tre of global econom ic gra vity. Ifthe reg ion is to achieve su stained
grow th , how ever, it will have to
dep end m ore heavily on productiv-
ity growth and on domes t ic and
regional dema nd. How far this re-
balancing proceeds in the coming
decade dep ends on the polit ical
w ill to address interests vested inthe entrenched e xport-led grow th
model.
In adapting t o this economic
gravity shift , Canada has many
distinctive compet itive ad vantag es.
It is th e w orlds larges t produce r
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24 Canada , China, and Rising A
A Strateg ic Prop
and exporter of uranium a nd p ot-
ash; t he se cond-largest producer of
nickel, wheat, and hydroelectricity;
and the th ird-larges t producer of
natural gas, diamonds, and renew-
able fresh wa ter (of wh ich it has 7
percen t of the w orlds t ota l). Its cit-
ies a re attractive an d w ork we ll
the World Economist Liveab ility
Index ran ks Van couver, Toronto,
and Calgary among the top ten
most liveable cities in the w orld.
Canadian-based firms compete
globally in construction and infra-
structure development; Canadian
pub lic pens ion an d social security
arrangements a re sustainable;
and its financial inst itutions are
strong.
Canad ians can leverage these
streng ths in imaginat ive a nd for-
wa rd-looking ways to help Asians
meet th e chal lenges of educa-
tion that encourages creativity
and innovation; access to natural
resources; t he developmen t of al-
tern ative energ y sources, liveab le
cities, and reliab le infrastru cture;
and g rowing middle-class de -
man ds for modern se rvices.
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25 Canada , China, and Rising A
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Enhancing
Can ad as Asia n
Eco nom ic Ties
The importance of state-to-state
relationships mea ns th at the reli-
able and trans parent framew orks
in which Canadian bu sinesses
respond to these opportun ities can-
not be bu ilt without comprehen sive
bi or multilateral economic ag ree-
ments . Two options a re of pa rticular
interest: joining the Tra ns -Pacific
Partnership and pursuing a deeper
economic relationsh ip with China
both p otential game changers for
Canada a nd by no means mutua lly
exclusive.
Joining t he
Trans-PacificPartnership
The TPP aims to be a compre-
hens ive, high-qua lity free tradeagreeme nt open to any economy
around th e Pacifica geograph ic
notion th at, in this case, even
includes Indiathat accepts th e
agreem ents a mbitious goals. The
TPP had mode st origins, begin ning
life in 2006 as an agreem ent am ong
Brune i, Chile, New Zealand , and
Sing apore. The s o-called P4 found
the a greeme nt relatively eas y to
negotiate b ecause of their comple-
menta ry economic structu res.
Sign ificantly, they e sta blished amecha nism for other countries to
joinAustra lia, Ma laysia, Peru,
and Vietna m have done so, Japan
has signa lled its interest, and
South Korea could follow wh en t he
US Cong ress ra tifies th e US-South
Korea free trade agreem ent. The
United Sta tes joined the T PP in
2009, considerably expa nding the
negotiations t o include fi nan cial
services and investment, wh ich had
been deferred in the initial agree -
ment. The Americans also com-
plicated t he ta lks by introducing
NAFTA Plus issue s such a s the
environme nt and labour, govern-
ment procurement , and intellectua l
property enforcementpa rticularly
on pha rmaceuticals and copyright
issuesand by argu ing for the useof sanctions ag ainst violators. The
TPP does not a ffect a ny count rys
commitments u nder th e World
Trade Org an ization (WTO), but
free trade a greeme nts a lready in
forcefor exam ple, those b etw een
the United States a nd, sep arately,
Chile (2003), Singapore (2004), and
Australia (2005)may be upg raded
as p art of TPP neg otiations.
For many Canadians, h owever,
the idea of hitching their economic
w agon t o rising Asia is still belowtheir radar. Most remain unaw are
of the TPP, and yet the pa rtners hip
could be a gam e chan ger, for several
reas ons . First , its inclusion of se r-
vices a nd investme nt offers a wa y
to address NAFTAs deficiencies in
services, reg ulatory harmon ization,
and investmen t. Second, the TPPs
broader reach an d mu ltiple neg otiat-
ing par tners could increas e oppor-
tun ities to make the trade offs that
are a vital part of any comprehe n-
sive ag reemen t. In Canad as case , it
would have to b e w illing to discuss
intellectu al property protection and
agricultural supp ly ma nagement,
areas w here it is viewe d as behind
global standa rds. In this, Canada
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26 Canada , China, and Rising A
A Strateg ic Prop
wou ld not be aloneothe r partici-
pa nts, not leas t the United States
have ag ricultura l issues . Aust ralia
and New Zealand successfully
rationa lized their own s upply man-
agement programs by abolishing
su bsidies (in New Zealand ne arly 30
years ago) an d by buying out farm-
ers (in Austra lia). Agriculture ha s
bee n a se nsitive issue for Chile as
well, but it has agreed to ph ase out
its tariffs by 2017 using s afegu ards
during the transition period to
protect the da iry indu stry. How long
can Can adas archa ic syste m hold
the nat ional interes t hostage? The
TPP provides a g olden opp ortun ity
to phase out such program s in re-
turn for concessions in other area s,
from the United States a nd othe rs.
It is s till too soon to say if the
TPP talks w ill achieve the ir goals.At the se venth round of talks in
Ju ne 2010 in Vietnam , pa rticipa nts
agreed to su bmit negotiat ing
framew orks for major sectors
including goods a nd s ervices,
intellectu al property protection,
FDI screening, government pro-
curement , and sta nda rdsto their
leade rs in Novemb er 2011, around
the t ime of the APEC sum mit in
Honolulu. To the exte nt the y suc-
ceed, they w ill have esta bl ished
baselines for future participants
that w ill be difficult to change.
Part of the long-term payoff for the
United States w ill be to extend th e
TPP to its larger t rading p artners,
including Canad a, but Canad as
continued preference for supp ly
management programs remains a
sign ificant obst acle to our partici-
pat ion. If w e can not or w ill not
join TPP, th en t he fallba ck pos ition
could be the n eg otiation of a series
of economic frame w ork ag ree-ment s w ith priority countries in
Asia, or w ith s ome other regional
Asian a rrangement .
Deepe ning Canadas
Economic Engagement
w ith China
For Canad a, anothe r possible
game changer i s to pursue deeper
economic t ies w ith China. On the
face of it, a bilatera l ne got iation
should be s traightforward since
trade betw een the tw o countries is
complementary: China e xchanges
its consum er goods for Can adas
natura l resources. In the short
term, the potent ial benefits wou ld
come from enlarged ma rkets and
economies of scale as w ell as re -
duced tran sact ions costs. Through
time, furt her be nefits w ould follow
from sp ecializat ion a nd the grow th
of intra-industry t rade as the Chi-
nes e economy evolves.
China already has pursu ed
free t rade a greements act ively
both w ithin Asia and b eyond. It
has agreements w ith Chile , NewZealand , Peru , and Singap ore (all
pa rticipa nts in the TPP), as w ell
as Cos ta Rica, Hong Kong a nd
Macao, Taiwa n, Pakistan, a nd
Thailand . In Janu ary 2010, China
implemented a n agreemen t with
ASEAN, and further negotiations
are unde r way w ith Austral ia ,
Iceland , India, Mong olia, Norway,
South Africa, an d South Korea, as
we ll as w ith ASEAN+3, ASEAN+6,
the Shan gha i Cooperat ion Organ-
ization, and the Gulf Cooperation
Council.
Any Canada -China talks should
aim for an ag reement th at is
consistent with WTO rules an d
broad ly bas ed , including ta riffs
and non-tariff barriers an d other
obstacles to services t rade an d in-
vestment . China maintains tariffs
in a num ber of area s, part icularly
in industries such as rice, meat
products , process ed foods, textiles
and appa rel, and vehicles a nd
pa rts. On Can adas side, 68 per-
cent of tariff lines are a lready tar ifffree, bu t tar iff-rate q uotas still
exist in supply-man aged products,
beef, and w heat . Both countries
likely w ould ga in from tariff redu c-
tions on pr incipa l exports; for
Canad a, these w ould come from
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27 Canada , China, and Rising A
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ag ricultu ral, minera l, an d serv i-
ces exports, wh ile China w ould
gain from expa nded a gricultural
exports.
Transp ortat ion and t ravel
services, rather th an commercial
services, dominate the tw o coun-
tries bilateral services trade , and
should be an important pa rt of ne-
gotiationsser vices account for 70
percent of Cana das GDP an d are
gaining significance in China as
we ll. Services trade in China faces
imped iments , how ever. In addition
to a tariff on the s ervices sect or
(est imated t o be around 9 percent
in 2004), state t rading e nterprises,
wh ich exercise ma rket power to
collect monopolistic rents, play a
sign ificant role. Other w ell-known
impediments include ow nership
and l icensing restrict ions, w eaken forcement of intellectu al prop-
erty rights , lack of admin istrative
transp arency, and discriminatory
procurement pract ices.
China would also demand th at
Canad a accord it ma rket economy
stat us (MES). In its WTO acces-
sion talks, wh ich concluded in
2001, China w as des ignated a
non-market e conomy, but it w ill
acqu ire MES automatically after
15 yea rsth at is, on Decem ber 31,
2015. Early recog nition of China a sa ma rket economy is also an issue
in its ongoing dialogue w ith the
United States. As the clock ticks
tow ard 2016, how ever, the va lue of
such e arly recogn ition is declining.
What are Can adas prospects of
succes s if it w ere to plunge d irect-
ly into free trad e ne gotiations w ith
China? China ha s had such neg oti-
at ions w ith three other developed
economies, and the record is in-
struct ive. Those w ith Austral ia a re
stal led: Ch ina remains reluctant
to address Australias interests
in liberalizing s ervices trade a nd
ag riculture, wh ile difference s exist
over Chinas interes ts in pe ople
flows, its protect ion of intellectua l
proper ty rights a nd Aus tralias
rules on FDI. Talks w ith Nor-
way are also at an impasse, and
despite i ts completed agreemen t
w ith China, New Zealand has en -countered d iscriminatory behav-
iour towa rd i ts da iry exports. This
record sug gests that , for Cana da,
moving direct ly towa rd a com-
prehensive bi lateral agreemen t
might not be th e most p roductive
choice. More promising might b e
to negotiate a s eries of confidence-
building agreements s tructured to
deliver libera lizing moment um a s
the y enter into force, and t o create
a framew ork for futu re talks as
Chinas comparative advantagechanges .
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A Propo s al for
a Cana dian
As ia Strateg y
To understand w hy Canada n eeds
an Asia strate gy, we need look no
further tha n Canad as surp rising
failure s o far to complete a free
trade agreement w ith a ny Asian
count ry. Talks w ith South Korea are
sta lled by auto and b eef interests
(Canada excepted supply manage-
ment even be fore the talks bega n).
Talks w ith Singap ore are sta lled
by un realistic demand s for con-
cessions equ al to those g iven to
the United States. And, as noted ,
Canad as p olicies on su pply man -
agemen t and intellectua l property
are blocking its par ticipat ion in the
TPP. In each cas e, short-term do-
mes tic political considerations a re
outweighing the e conomic calculus
of the national interest.
This ad hoc approach is risky
and short s ighted . It invites ever-
heavier relian ce on de veloping
and exp ort ing natural resources
and energy to sus ta in Canadians
l iving stand ards, and , as Asian
economies determined ly move up
the value chain, Cana dian non-
resource-base d indus tries w ill find
it increas ingly difficult to compete .
Canadians need to th ink aga in
about how to seize the opportunity
and strateg ical ly re-engage w ith
Asia, start ing with determ ining
what we w ant and how we should
achieve i t . Instead, Can ada si ts onthe sidelines a policy ta ker. To
have a voice, Canad a ha s to show
up, to b ecome involved in col-
lective app roaches to political and
economic development that serve
its deep interests in open markets.
Canad as strateg y toward China
should be a n integ ral part of its
strateg y towa rd Asia in gen-
eralthe tw o should be mutu ally
reinforcing. Can adas goa ls in for-
mulat ing an Asia strateg y should
be to promote cooperat ion w ith
the Chinese w here feasible and to
reassu re those who are concerned
about an exclusive focus on China.
China recognizes the value of
multilatera lism, not jus t becau se
i t used i ts accession to the WTO
to restructure i ts economy and
enter w orld ma rkets, but be cause
these inst i tut ions provide a w ay to
pu rsue its objective of restra ining
US heg emon ic beh aviour.
Within t his s t rategic frame-
w ork, there a re at least five criteria
to consider in choosing am ong
alternat ives a nd set t ing policies.
First , the Asia strategy s hould
be gene rat ional and serve Can-
adas long-term n ational interests;
framed in this way, the st rategy
should, like de ficit a nd debt reduc-
tion, be followe d th rough by su c-
cessive governments regardless of
political stripe. Second, the strat-
egy s hould focus on the largest of
the Asia-7 players, which w ill have
the greatest effect on ou r economic
future. Th ird, it sh ould aim t o solve
the d ifficult ies Ca nad ian bus i-
nesse s face in the reg ions d istantand un famil iar economies through
improved ma rket access and
grea ter pa rticipation its production
netw orks. Fourth , the strateg y,
recognizing that Asias dynamic
economies w ill move up the value
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29 Canada , China, and Rising A
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Res tore Canad as
pres ence in the regionState and high-level personal
relationships are essential to the
confidence and trus t on which
long-term a greements are b uilt .
Canad a has b een act ive in APEC,
but th at body no longer drives
regional integrat ion a nd w e have
been s low to seek memb ership
in the n ext gen erat ion of inst i tu-
tions. At the ap ex of the se is the
East Asian Summit , but with the
recent add ition of Russia and t he
United States, some are pus hing to
close i ts mem bersh ip, wh ich w ould
leave Can ada out . Canadas m inis-
ter of defence ha s pa rticipat ed on ly
once in the nine meetings of the
Shang ri-La Dialogue , the regions
lead ing se curity forum , wh ile US
and Chinese officials at th e high-
est levels ensu re they ha ve a voice
in the new regional architecture.
Canad as inact ion in such matters
signa ls th at it is concerne d only
ab out bilatera l relationsh ipsa
serious misread ing of Asias evolv-
ing arch itecture. It is not yet too
late, however, and Can ada should
beg in by endow ing the ASEAN-
Canada Enhanced Par tnership
(201015) with su fficient resou rces
and p ersonnel commitments to
real ize i ts intended educat ional
exchanges , dialogues on inst i tu-
t ions, t rade and b usiness, the
environment , crime, and new tech-
nologies. With that engage ment
as a building block, Canada t henneed s to pursue other opt ions,
includ ing app lying to join th e Eas t
Asian Summit an d pa rt icipat ing
in securi ty dialogues an d in both
ASEAN-related act ivities an d th eir
regional and trans-Pacific counter-
pa rts. These initiatives are more
likely to be succes sful if Can adaidentifies and builds relat ionsh ips
w ith economiesIndonesia and
South Korea, for exam plewhos e
governments m ight be w ill ing
to serve as e ntry points to Asian
regional institutions.
Develop the Canada brand
Cana da s hould develop itself as a
brand, both a t home an d in Asia .
At home, the proclama tion of a
Year of Canad a an d Asia w ould
help build pu blic awa reness of
the importance of tha t par t of
the world for Can adas e conomic
future. In ad dit ion t o federal gov-
ernm ent pa rt icipat ion in Asian in-
s t i tut ions , governments and other
inte res t s w ithin Canad a should
a lso be encouraged to be come
involved in t he As ia strate gy. For
example , Ot tawa should engage
provincial premiers in developing
an integra ted approach to Asia ,
one tha t se es them coordina t ing
their Asian t ravels and a l ign -
ing th eir policies in their area s
of jur isdiction, including include
hea lth, educat ion, and e ven FDI.
Business groups and t rade as -
sociat ions could pu blicly sh ow-
case companies w ith successful
business s t ra tegies in the region
and w ork to encourage visi ts to
Canada by Asian tour i s t s . Can-
adian un iversi t ies s hould bu ild on
the count rys grow ing reputat ion
as a place in wh ich to becomeeducatedalready, internat ional
s tudents a re es t imated to spend
more tha n C$6 bi l lion a nnu ally
s tudying in Canad a , 40 percent of
i t by Chinese a nd South Korean
stud ents . Universit ies and othe r
Elements of the Strateg y
chain, should pu rsue te chnological
collaborat ion that helps ad dress
Canadas weak productivity
performance a nd bu ilds p otent ial
complementa rities. Fin ally, any
Canad ian Asia strategy should be
sen sitive to US interes tsth ough
Canad ians m ight not real ize i t ,
strong moves to diversify the
markets for our energy and n atural
resources w ill have g eopolitical
significance.
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30 Canada , China, and Rising A
A Strateg ic Prop
educat iona l inst i tut ions shou ld
also cooperate in d eveloping
channels through w hich young
Canadians can c rea te bus inesses
in Asia or find em ployment in
enterprises located there.
In short , Canad ians should
beg in to think of Canad a as an
Asian location, linking w orld-class
expert ise in research and b usiness
development across b orders. Signs
of this sea change are already evi-
dent: Calgary is pursuing a global
hub strateg y for non-conventional
petroleum and al ternat ive energy
development , Montrea l is an aero-
space and pha rmaceuticals hub,
and Toronto aims to b ecome an
interna tional financial centre. As
McK