With the period of relative economic decline that the United States has entered, coupled with the recent turmoil that has followed the failure of its government to raise its debt ceiling, no other country is more jeopardized than Canada given its historically high economic integration with its southern neighbor. In fact, nearly 40 years ago, based on the premise that US economic penetration was a source of vulnerability, the Canadian parliament passed the 1974 Foreign Investment Review Act, whose aim was to regulate new foreign direct investment (FDI). And a key recommendation from the review that Pierre Trudeau had initiated was that Canada should reduce its vulnerability to the U.S. Yet, as of 2013, about 75 percent of Canadian merchandise exports go to the United States, which means Canada is still particularly vulnerable to the vagaries of its neighbor’s economic and political scene.
Canada remains curiously underdeveloped as a Pacific nation, even though China and India are now huge and ever growing players in the world economy, with an insatiable appetite for resources. Despite a global commodity boom that began in 2003, fuelled by industrialization and urbanization in emerging economies (average resource prices have more than doubled since then), Canada was second only to Britain among G20 nations in turning in the worst export performance between 2000 and 2010. And as current Governor of the Bank of England Mark Carney has said in a 2012 CIC report, “In late 2011, Canada woke up to the fact that it was dependent on the U.S. market to purchase the majority of its goods and services, including 99 per cent of its energy exports. The trigger for this revelation was the refusal by President Barack Obama to grant a permit, pending further study, for the cross-border Keystone XL Pipeline to carry crude from Alberta’s oilsands to U.S. refineries.”
Where does Canada stand now? The rise of so-called global value chains (GVCs), which has fundamentally changed the organization of global production, the massive shift in the distribution of world income to emerging and developing economies, unprecedented technological revolutions, and the markedly competitive nature of today’s global markets, have all been game changers for developed economies like ours. Indeed, economists have pointed to the need for Canada to improve its external competitiveness, especially by increasing its labor productivity.
On the positive side, Canada has slowly but surely, in the past few decades, been diversifying its imports and exports, worked on a number of free trade agreements (FTAs) and foreign investment promotion and protection agreements (FIPAs), and invested massive capital in infrastructure. The question, now, becomes: is Canada on its way to becoming a pivot state, a country capable of avoiding excessive dependence on one powerful commercial partner by further diversifying its trade and investment relationships, particularly toward rising Asia?
A quick look at some of the Department of Foreign Affairs, Trade and Development’s (DFATD) reports shows that Canada is apparently on the right track. We are now in the process of negotiating five FTAs in Asia, including the so-called Trans-Pacific Partnership (TPP), this latter being an agreement that would in itself significantly lower barriers to trade among 12 Pacific nations. Additionally, the DFATD 2013-14 Report on Plans and Priorities includes, as one of its plans, the “Increase [of] Canada’s economic and political engagement in Asia.” “The shift of political and economic power toward Asia,” the report goes, “highlights the importance of expanding Canada’s bilateral and multilateral relationships in the region. To take full advantage of new opportunities, Canada will promote greater access to, and penetration of, rapidly developing markets.” And over the past eight years, China has been become Canada’s fastest rising trade partner, growing ten times faster than Canadian trade with the rest of the world.
Despite these advances, a quick look at Canada’s Global Strategy shows that our “strategy” involves the targeting of just about every region of the world besides Africa and Central Asia. Additionally, our economy is still heavily dependent on the U.S.’s economic health, we are underinvested in emerging economic powerhouses such as India, and some of the FTAs currently negotiated are unlikely to come to fruition any time soon. It remains to be seen how the current opportunities and risks in Asia will be balanced together with Canada’s domestic politics. One thing is sure: we need to enhance our global economic position, develop clear and consistent international strategies and policies toward the Asia-Pacific, and remain competitive in an increasingly cutthroat global marketplace.
By Samuel Gendreau