Canada should be well positioned to take advantage of strong economic growth in Asia, but the underlying evidence suggests we haven't taken full advantage of the profound transformation occurring across the Pacific. Is Canada missing its Asian opportunity?
There is little doubt that Asia is the centre of global economic growth. While Japan's economy has stagnated over the past two decades, economic transformation and more robust growth have continued in many Asian countries – China, South Korea, Taiwan, Association of Southeast Asian Nations members such as Malaysia and Indonesia, and India. Economic growth in emerging Asia is expected to reach 6 per cent in 2015, aided by sharply lower oil prices. Increasing exports to the growing Asian markets provides a valuable complement to the strengthening U.S. recovery.
On the surface, Canada appears to be making progress in capturing this opportunity, as shown by recent Conference Board of Canada research: Trade has doubled over the past decade and Canada is on the receiving end of foreign direct investment from Asia. In addition, we are attracting growing numbers of Asian immigrants, tourists, real estate investors and students to our colleges and Universities.
But probe a bit deeper and you will find that these outward signs belie the reality. Canada's trade market share with Asia has been cut in half over the past two decades, from 2 per cent in 1993 to 1 per cent by 2013. Although our trade with Asia is growing, Asian trade over all is growing even faster, thanks to expanded use of global and regional value chains. Despite increased exports to Asia, Canada is still largely dependent upon exports to slower-growth economies. Furthermore, some indications are that we are not taking full advantage of opportunities to export higher-value-added products.
Foreign direct investment into Canada from China and other Asian countries is growing more rapidly than Canadian direct investment into Asia, suggesting Canadian firms are not fully grasping opportunities to strengthen their business models in Asia. Only a select number of Canadian businesses, notably in financial services and resources, seem to have an active strategy for growing their footprint in Asia through expanding and investing abroad. Within Canada, there have been some reductions to barriers to entry for Asian investment, but other investment rules have been tightened, notably for Chinese state enterprises looking to invest in Canada. There may be good specific policy reasons for this approach, but the net economic effect is to limit business with Asia.
Opportunities have been lost. After strong initial progress in free-trade negotiations with South Korea, the negotiations then stalled for years due to pushback from some affected sectors such as automotive. The U.S. pulled ahead in its own free-trade negotiations with South Korea and eventually signed a deal before Canada. Thus, we are now in catch-up mode behind the Americans in one of the most attractive Asian consumer and business markets. It also appears that while South Korean enterprises have mapped out their opportunities in Canada, Canadian enterprises have been slower to understand theirs in South Korea.
Canada was also late to the table for the Trans-Pacific Partnership (TPP), a free-trade negotiation involving countries around the Pacific Rim. We are now engaged in TPP, but are reluctant to give up protectionist practices in the agricultural sector. If we act to protect our "sacred cows," we will be unnecessarily entering negotiations from a defensive posture over a practice that should have been dismantled some time ago, rather than moving aggressively to seize the opportunity. (Dairy supply management has been estimated to cost each Canadian family $276 a year, and our research finds that the system limits the growth and success of the very industry it is designed to protect.)
Perhaps most importantly, Canada is nowhere when it comes to selling our oil and gas to the rapidly expanding markets in Asia. China's fuel consumption is expected to grow by 40 per cent between 2010 and 2020 – but Canadian oil and gas exports to Asia are essentially zero, representing but 0.2 per cent of Canada's total oil and gas exports. The lack of adequate energy shipping infrastructure to reach Asian markets is a serious barrier to trade development.
The bottom line? Canada could be letting the Asian opportunity slip through its fingers. If we fail to focus on what is important and move quickly enough to capture our fair share of the Asian market for trade and investment, we will ultimately have only ourselves to blame.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada and Daniel Muzyka is the president and chief executive officer.
Glen Hodgson