The Canada-China relationship – how we keep up the momentum

The CCCE, in partnership with Canada 2020, held an event titled “Canada-China Relations, Keeping up the Momentum”. At the event,Wendy Dobson of Rotman presented her book, Partners and Rivals:  The uneasy future of China’s relationship with the United States. She exhorted Canadians to anticipate the future, when China will move up the value chain in sectors such as rail, advanced manufacturing and clean teach and look for innovation partners. Canada can play in this space. Dr. Dobson noted Canada is seen positively but not strategically in China.
Thoughtful views from Ralph Lutes of Teck, and Bruce Simpson of McKinsey, brought out the key business opportunities and importance of China to Canada’s economy. Mr. Simpson challenged Canada to think about helping China get its cities right – we have three of the best cities in the world in Toronto, Montreal and Vancouver. If current trends hold, by 2025 China will have 221 cities with one million–plus inhabitants, says McKinsey. Canada has the expertise to help China get its cities right.
Premier Brad Wall set out his vision for Saskatchewan’s engagement with China, driven in large part by agriculture and energy products.  Given the huge opportunities for Canada, what we need, in Premier Wall’s view, is a long term vision.
What might that long term vision for deeper Canada-China engagement entail?  Here are five thoughts:

  1. Create a Strategic Partnership at the leaders’ level, as Australia has done.  Our PM, of no matter what political stripe, could engage on a yearly basis with his counterpart.  This is a matter of smart geopolitical and economic management. In a multipolar world, and with such a solid base in Canada’s relationship with the USA, we need to think about a similarly high level, complex, and regular series of “top to top” engagement with China.
  2. A Team Canada approach to China to match our competitors.  Government and business need to work together to create opportunities for Canadian firms.  This is especially important for aerospace and energy. Choose sectors where Canada is a winner and align with Chinese needs.
  3. Ensure we have open trade and investment regimes.  Taking the next steps in our trade relationship with China – either through sectoral agreements, free trade negotiations, or encouraging China to join TPP – is important to keeping up the momentum.
  4. Encourage as many student exchanges, cultural visits and two-way tourism as is possible.  Our people to people ties are essential for understanding one another, and deepening public awareness and engagement with China.
  5. Think about the skills of the future Canadians will need to take advantage of China and Asian growth markets.  Then act to improve them.  Language skills, cultural awareness, team problem solving, STEM skills to help China build great cities and a better environment.  These skills need all of our education systems – JK to 12, colleges, universities, think tanks, skilled trades – to be partners.

The CCCE and its member companies will continue to build on the knowledge developed during our 2012 conference, Canada in the Pacific Century, to engage Canada in discussions on the opportunities Asia’s rise provides.
Ailish Campbell is Vice President, Policy, International and Fiscal Issues, at the Canadian Council of Chief Executives.

Australia’s Asian Century – Canada’s too?

I am British by birth and Canadian by choice. While I have a healthy respect for the Commonwealth, I have never aspired to go beyond my two nationalities – until this week. Now I want to be an Australian.
This admiration for Oz is precipitated by a new White Paper presented by the Australian government last week, Australia in the Asian Century.
The nearly 300-page paper is ambitious, strategic, well-written and comprehensive. One Australian commentator called it ‘lofty and inspirational’. That is what is at the root of my Australia-envy. It has been a long time since I have been inspired by a white paper. But then it is also a long time since I have seen a white paper in Canada. The Parliament of Canada website shows that the two most recent white papers were produced in 2010: one on cyber security and the other on the Arctic. There were two produced in 2009, none in 2008 and one in 2007.
One inspiring thing about Australia in the Asian Century is that it connects the challenges Australia faces in penetrating Asian markets with domestic objectives, including building up the five pillars of productivity: skills and education, innovation, infrastructure, tax reform and regulatory reform. It also underscores the need for Australia to learn from, not just sell into, Asia, now a ‘world centre of innovation and technological development’ (p.43).
The daunting thing is that Canada has to compete with Australia in developing relationships in Asia. We are clearly starting behind the pack. The Australian White Paper opens with the statement that:
“Our nation … has the strength that comes from a long history of engagement with countries in Asia. Australia’s relationships in our region are strong and robust, including with Asian nations like China, Japan, India, Indonesia and the Republic of Korea (South Korea).” (p.1)
Contrast this with the opening paragraphs written by Dominic Barton, Global Managing Director of McKinsey in Canada 2020’s 2011 anthology The Canada We Want in 2020.
“Asia….feels geographically and culturally distant, despite the fact that Canada is a Pacific nation. Links are sparse and Canadian businesses lag their rivals from other OECD countries in terms of Asian penetration”(p.35)
It is true that the Harper Government has “pivoted” towards Asia over the past two years. In addressing the recent Canadian Council of Chief Executives conference on Canada in the Pacific Century, Foreign Minister Baird noted that “We have made 77 cabinet-level or Prime Ministerial visits to the Asia-Pacific in the past three years alone”: tomorrow the PM will add to that total when he leads Ministers Fast, Ritz and Oliver to India.
Minister Baird went on to emphasize the steps the government has taken in the trade area (while acknowledging that there has yet to be a trade agreement signed with an Asian nation), its goals in regional security and governance and the important increase in Canada’s diplomatic presence in Asia. Lastly, Minister Baird noted the importance of promoting Canadian values in the region, citing Canadian support to Burma.
But this Australian manifesto underlines how far we have to go and how widely we need to participate in the effort. Skepticism and fear of Asia, and China in particular, is rife in Canadian society, government and business, as evidenced by the debate over the CNOOC/Nexen deal and the China-Canada FIPA. The government position on both these issues has done nothing to reassure Canadians that their interests will be served by deepening relationships with the globe’s most – perhaps only – economically vibrant region.
What the Australian White Paper does so well is to project a rallying cry to the whole of Australian society. What is required is concrete measures such as the proposal that one-third of board members of Australia’s top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions) will have deep experience in and knowledge of Asia, as will one-third of the senior leadership of the Australian public service.
Concrete measures yield concrete rewards. If Australia meets it objectives in Asia, it is projected that per capita real annual income will rise by A$3,000 per annum by 2025 (up from the ‘business as usual’ projection for 2025 of A$70,000 to A$73,000: the 2012 figure is A$62,000). This will put Australian in the top 10 globally for per capita income (it is already ahead of Canada, according to World Bank figures).
Rana Sarkar from the Canada-India Business Council provided much-needed inspiration when he wrote in his contribution to The Canada We Want in 2020 of our need to double down on existing policy, but also to be opportunistic, creative, bold and strategic in our approach to Asia.
This Australian White Paper puts flesh and clear targets on the strategies that Sarkar referenced. It talks of the need for government to lead a broad coalition of “business, unions, community groups and educational and cultural institutions” to improve people-to-people links to unlock large economic and social gains (p. 3) and while it pinpoints key growth opportunities for Australia (including mining, tourism, agriculture, education, environmentally sustainable development), it also highlights the contribution of culture and the arts.
“The arts, culture and creativity can broaden and strengthen Australia’s relationships in Asia, both formally and informally. Australia’s cultural strengths—as home to the world’s oldest living culture, and as a country that welcomes diversity—underpin values of respect, understanding and inclusion that help to connect people, business, institutions and governments.“ (p.8)
Australian commentators have criticized the document on two main grounds: the first is that it is not all new. A number of the targets and programs it apparently ‘announces’ are already in existence (cited here are the 12,000 Australia educational Awards (over 5 years) for study in Asia or for Asians to study in Australia). The second is that there are not enough specifics or resource commitments behind the lofty policies.
From a Canadian perspective we have to hope that that is the case. Australia starts ahead of us in Asia. It has a similarly stable economy to ours. But it also has greater ambition, it seems, and a stronger track record in solving the type of problems that Asian countries face (for example, it already has experience with carbon pricing and can point to successes in water and soil management, while Canada has no binding national laws on drinking water quality, river basin management or agricultural waste: all pressing problems in Asia).
If we are to ‘leapfrog’ others in our quest to get ahead in Asia we clearly have to jump very high: it would help if our competitors could crouch, but that does not appear to be happening.

Nexen-CNOOC – Searching for Canada’s “Net Benefit”

Next month shareholders of Nexen vote on a lucrative offer from a company owned and controlled by the Chinese government for all of the shares in the Calgary-based, Canadian oil and gas company. If they do not say “yes” it will be a miracle. After all, The Chinese National Overseas Oil Company, or CNOOC as the buyer in known, is paying a sixty-six per cent premium on the price the shares were trading at when the offer was made on July 23, 2012.
CNOOC is so confident of the shareholders’ agreement that it has already asked for federal government approval of the deal, even though the formal vote has yet to be held. Because this would be a foreign takeover of a large Canadian company, the purchase requires the approval of the federal government agency, Investment Canada, before it can go through. The fact that the buyer is a company controlled by the Chinese government means that the pending decision by Ottawa has already attracted a lot of attention and comment.
The Nexen deal falls neatly into two of the five areas on which Canada 2020 is focusing in our ongoing project, “The Canada We Want in 2020.” Launched in the fall of 2011 and followed up with five public sessions in the spring of this year, the project looks at Productivity and InnovationIncome InequalityHealthCarbon and Energy and the rising importance of the Asia-Pacific region. The Nexen deal clearly falls into the ambit of both of the last two categories and is also of relevance in the productivity and innovation area.
When it reviews the deal, Industry Canada, on behalf of the federal government, will have to decide if there is a “net benefit” to Canada should the sale of Nexen to CNOOC go ahead. Clearly Nexen shareholders benefit, as does the Chinese government. That is why the deal has been tabled. Shareholders get a large premium for their shares and China gets all of the company’s energy resources, not just in the Alberta oil sands but also in the Gulf of Mexico, the North Sea, Latin America and West Africa.
Those supporters of the deal who do not directly benefit from the sale believe it is good for Canada because it attracts much-needed foreign investment to develop the oil sands. This is crucial not just for Canada’s energy needs, but also for the revenues and both direct and indirect jobs the oil sands will create. And, they point out,  saying “no” would represent a big setback to warming economic and political relations between Canada and China, which stand to yield other, larger benefits over time.
But opponents of the deal have a number of arguments as to why the sale should not go ahead.
The opposition of environmentalists who oppose any further development of the oil sands is easy to understand. But others have raised objections on a number of grounds, including that:

  • Nexen operates in one of Canada’s core strategic industries.
  • because CNOOC is owned by the Chinese government, this is not really a business and economic question but one of politics and foreign policy. Even if, as promised, the American head office of CNOOC is in Calgary and a class of shares in the company is traded on the TSE, the company will be an instrument of the Chinese government’s political, economic and foreign policy and the deal must therefore be regarded in that way.
  • there is no Canadian-Chinese reciprocity on such transactions. If a Canadian oil company wanted to buy a Chinese-owned one it could not.
  • the Chinese record on repressing human rights is reason enough to block the sale (opponents cite the Chinese government’s dealings with its smaller neighbours in disputes in the South China Sea, its manipulation of exports of rare earth minerals and its support of both Iran and the current regime in Syria).

The “net benefits” test in the Investment Canada Act was not conceived to deal with such non-economic questions. Yet the rise of  state owned enterprises and sovereign wealth funds that are created and operated by governments, has made these questions at least as – or even more – important than the pure economic questions that were originally envisioned by the test.
A further problem is that the definition of “net benefits” is so vague that it can mean almost anything on any given deal.
Whatever answer is given will set a precedent for how future, similar deals will be judged. This is why there is so much interest in how the Nexen – CNOOC deal plays out and why, at Canada 2020, we are following the developments very closely.

Canada must adjust to the Asian century

Over the coming decades, Asia will become the global centre of aspiration, innovation and technology. Canada’s long-term prosperity and security will increasingly depend on its ability to understand and seize economic opportunities in the region – particularly in the twin giants of China and India – as well as in countries such as Vietnam and Indonesia.
What’s more, Asia’s influence is spreading globally. New, non-Western webs of power are emerging, exemplified by the growing Brazil-China relationship, meaning that Canada’s success in other regional markets will depend on how much we matter in Asia.
Despite – or, perhaps, because of – their manifest success, Asian countries are at the forefront of the biggest collective action challenges of our time. These range from critical shortages of water, energy and food, to a need to fill education, health care and infrastructure gaps and to address climate and other environmental concerns. Outsiders who offer practical, targeted assistance to Asian countries to overcome these problems will be well-placed to reap the economic and political benefits.
To succeed in this environment, Canada needs to be visible, useful and creative. Competition for Asia’s attention is intense and Canada has fallen behind. Our reputation as a gateway to natural resources may open the door to Asia, but we need to be resourceful and identify additional roles to keep that door open – be it in education, health care, environmental stewardship or elsewhere.
We must also recognize that Canada’s businesses, academic institutions, non-governmental organizations, provincial governments and citizens are already active in Asia and are important faces for Canada. These new diplomats need to be empowered to work on Canada’s behalf.

What does this mean in practice?

To start, the federal government should double-down on its bilateral and regional engagement. Any strategy for Asia must be led, and seen to be led, from the top – especially in countries such as China, South Korea and Singapore, where the state plays a major role in the economy.
There has been rapid progress in the past year. Stephen Harper’s high-profile visit to China yielded many new initiatives, among them a joint study to examine potential for a trade agreement. Negotiations are moving swiftly to conclude a Comprehensive Economic Partnership Agreement with India by 2013, and Canada is lobbying hard for member status in the nine-country Trans-Pacific Partnership. The challenge will be to sustain our attention and follow-through. We must not allow our fiscal woes to distract us from this.
Secondly, Ottawa should identify and deploy smart investments to develop Canada’s brand image. Among these should be a Canada Brand Equity Foundation, in partnership with the provinces and private sector, to manage and measure perceptions of Canada in key hubs, cities and regions in Asia. For example, expanding the CBC’s presence in Asia with content targeted at local markets would be a low-cost way to enhance Canada’s “mind-share” in Asia.
Canada’s brand could also be enhanced by associating with iconic, highly visible projects in Asian countries. For example, Ottawa should push to achieve partner-country status for the Delhi-Mumbai Industrial Corridor, Asia’s largest building project (Japan is already there). It’s also time to revisit the argument to build a Sovereign Wealth Fund by pooling our resource rents. Such a fund would enable us to invest at scale in Asia and put us at the top table of global capital partners for Asia’s leading companies and governments.
Third, the federal government needs to find better ways to source and co-ordinate leadership from below. This could include a “wiki events” calendar that would share itineraries and allow groups to “self-organize” events and partner in real time.
Competitions and contests are another tool to engage this sector. For example, for a small sum, we could offer a “Canadian X-Prize” and motivate smart crowds to work on Canada’s behalf. This would involve picking a country and specific problem in Asia (for example, rural electrification in a given Indian region) and offering a prize in conjunction with Canadian universities and leading Canadian companies.
Finally, an overarching part of Canada’s Asia (and global) strategy should be serial experimentation. Not all the ideas outlined here will work, but we need to experiment to see what gains traction. We should follow the lead of the smartest companies that rely on “fast failure” to find their way in a fast-changing world.
Canada is behind in Asia, but we’re catching up. We should build on current efforts by using new, cost-effective tools of diplomacy to show Asia that Canada is an indispensible partner.

Canada must leap ahead in Asia

Canada is back in the game in Asia. With two recent visits by Prime Minister Harper (to China, Thailand, Korea, and Japan) and a path-breaking trip to Myanmar by Foreign Minister John Baird, the government has begun a serious policy tilt towards Asia.
The recent federal budget underscores this leaning towards Asia, with its focus on trade and investment negotiations across the region. Canada is now in various stages of bilateral free trade talks with five Asian countries, and is making the case for entry into the Trans Pacific Partnership (TPP), a grouping of nine Asia Pacific economies.
If the government seems to be in a bit of hurry on Asia, there is good reason. Canada’s market share in Asia is below potential, we have no full trade agreements with Asian countries, and Ottawa has not been invited to regional clubs such as the East Asian Summit.
Entry into the TPP is by no means assured.  Ironically, one of the main obstacles is our closest ally and trading partner, as was evident in the remarks by President Obama at the recent Canada-US-Mexico Summit. Obama suggested that Canada’s supply management system for dairy and poultry products could be a deal breaker. This issue was known to be problematic, but it is telling that the US President would draw attention to it rather than to the importance of bilateral economic ties and the proven success of NAFTA.  Even though the US has clearly made a policy “pivot” towards Asia, there little indication to date that Washington DC considers Canada as playing a useful supporting role for American objectives in the region.
Canada is playing catch-up in Asia, which explains the frenetic pace that this government has set for itself on trade agreements.  In my paper for Canada 2020, I outlined the elements of a “catch-up” strategy on Asia and am pleased to see that many of these ideas are now being implemented.  If the current policy tilt to Asia is sustained, there is every reason to believe that we can indeed catch-up.
But there are no prizes for simply entering the race. To recognize that China and India are global powers and that Asia is vital for Canada’s future prosperity is simply to be on the same page as every other major industrialized country.
In addition to a catch-up strategy, Canada needs a leap-frog strategy.  The goal should be no less than for Canada to be the most Asia-engaged country in the western world.
Leap-frogging our competitors will require a commitment at the federal and provincial levels, as well as by business and civil society, to make sure that Canadians have the knowledge and skills to be effective in an increasingly Asia-centric world. If future generations of Canadian leaders are to become more Asia-engaged, there will have to be substantially more teaching about Asia and Asian languages in the education system, including at the elementary and high school levels.
In one key area, Canada can already lay claim to be the most Asia-connected country in the industrialized world. In relative terms, human ties between China and Canada are longer and deeper than for any western country, and in Vancouver we have arguably the most Asian city outside of Asia. These are assets in the Canada-Asia relationship that are grossly underutilized; they offer the potential to leverage diplomatic, commercial and civil-society ties with Asian countries that other western countries can only regard with envy.
The federal government’s Asia Pacific Gateway and Corridors Initiative (APGCI), for example, has set the stage for Vancouver to become not simply the preferred entry point for Asian shipments to North America, but the premier hub for government, business, cultural, and research linkages connecting the two sides of the Pacific. A gateway is valuable in part because of what passes through it, but more so because of the value-added activity that happens within and around it. The next phase of the APGCI should therefore focus on the “gateway economy”, which would include activities such as the development of business and professional services for global Asian firms and the attraction of Asian head offices for their North American operations.
In the near-term, the most important game-changer in the Canada-Asia relationship is energy exports. Current debate around oil sands and shale gas development in western Canada, and the construction of the Northern Gateway pipeline to the coast, focuses largely on the impact on Canadians, especially First Nations. The bigger story, however, is that the coming energy glut in North America could lead to the creation of a trans-Pacific energy market. In addition to significant economic benefits for Canada, energy trade across the Pacific could lead to increased energy security in Asia, superior environmental outcomes in the region, a more balanced trade relationship, and stronger diplomatic ties with Asian countries.
As global economic and political weight continues to shift towards Asia, Canada has to work harder just to be noticed. Our ability to put in place the infrastructure and regulatory framework for energy exports – and to foster cooperation on energy issues more broadly, including on renewables – will be watched closely in Asia.
It is in some ways a major test for Canada-Asia relations: success will mean a significant new platform for trans-Pacific ties in an area that matters hugely to Asia.  Failure, on the other hand, will signal that Canada cannot muster the political will to diversify its economy, even where the opportunity and potential is so clearly evident.
This, in turn, raises a scenario that I would rather not contemplate: that we neither catch-up, nor leap-frog, but instead fall further behind in our ties with the most economically dynamic region in the world.
Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada.

A new Asia strategy for Canada

For the past 250 years, Canada’s deep and mutually beneficial economic links with its superpower neighbour to the south have stood as a cornerstone of our growth and prosperity. While the US will continue to be a major economic partner and critical ally for Canada, its hegemonic days are likely over. The size of the Chinese economy alone is expected to rival that of the US by 2020 – 2030.  That gives Canada only a decade or two to accomplish a major re-orientation of its economy.
The economic links between Canada and the US are broad as well as deep.  There is a deep web of ‘connective tissue’ that binds the two countries, not just economically, but also socially, culturally, and politically. Asia, on the other hand, feels geographically and culturally distant. Links are sparse and Canadian businesses lag their rivals in terms of Asian penetration: only half of the 20 largest Canadian companies have operations in Asia – 100% of the top 20 American companies do.
Canada has a significant mountain to climb. Recent McKinsey research found that not only did many Chinese consumers not know where Canada was, but that the only reference they had for the country was that it was the “place to go for clean air”.
The re-orientation of Canada’s economy towards Asia is unlikely to happen organically – and certainly not at the speed required. The kind of strategic thinking, action and coordination required to achieve this will be a challenge in Canada’s decentralized system of governance.  But previous challenges have brought Canada’s government, business and civil society communities together to act jointly to address major issues. We must do it again. For without such strategic action, Canada’s future prosperity and political power and relevance are at risk.
A first step is for the Prime Minister to appoint a Minister for Asia and establish an Asia Advisory Council made up of 15-20 influential Asia-based politicians and business people. The Minister for Asia would be a key contact point for Canadian businesses, civil society and Asian governments.
Second, we should seek to build on our strong base of human ties with Asia. Increasing the number of Asian students studying in Canada has benefits beyond the pure economics; it also extends personal links that will bear fruit into the future. At the same time we should increase Asian content in our own education system.
Governments in Asia are very strategic about supporting their own companies. We should take a leaf out of their book, identifying and actively supporting strategic sectors. There are many good candidates, including infrastructure, agri-food, aerospace and financial services.
Canada has some of the most admired infrastructure in the world and China has a huge infrastructure need: by 2025 more than 220 Chinese cities will have over 1 million inhabitants. Our financial system came through the 2008 crisis in stronger shape than those of other developed economies and our regulatory system and banks are globally recognized for effective governance and risk management. Aerospace presents another opportunity. China and other Asian countries are keen to develop aerospace industries.  Bombardier is the third largest civil aircraft manufacturer in the world and we also have many successful suppliers to the industry.
Growing Asian interest in both consuming and owning Canadian resources is inevitable. This presents opportunities and risks for Canada. Overseas investment could help bring down the cost of development, expand and modernize our resource infrastructure and create more jobs for Canadians. To take full advantage of this opportunity Canada must proactively invest in its resource infrastructure. We cannot build an energy link to Asia, nor become an energy superpower, unless pipelines to the West Coast are built and the necessary export facilities and shipping lanes authorized.
At the same time, it is imperative that Canada has in place an effective long-term plan for managing its own resources. Our current policy on foreign ownership is unclear to many. We must also ensure that we are not simply spending the wealth of future generations. The Government of Canada should consider working with resource rich provinces to establish an investment fund, like Norway’s, to ensure that future generations of Canadians benefit as much as Canadians of today.
The world is re-balancing towards Asia; Canada must re-balance with it. This will not happen without strong federal government leadership. Canada’s own Asia century must start now.
Dominic Barton is global managing director at McKinsey and Company.